Education Management Corporation, which enrolls 72,000 students on 72 campuses in 24 states, agreed to sell itself on Monday to two private equity firms for $3.4-billion, marking the first time a publicly traded higher-education company has turned private. The move triggered speculation among analysts that the deal could lead to other takeovers of for-profit colleges.
The purchase by Providence Equity Partners Inc. and the investment arm of Goldman Sachs Group Inc., which is contingent on approval by the U.S. Department of Education and the colleges’ regional accreditors, is the largest-ever buyout in the for-profit higher-education industry. In a conference call with reporters and analysts on Monday, John R. McKernan Jr., Education Management’s chief executive officer, said taking the company private will give it access to “patient capital” in contrast to money from public investors, who fixate on quarterly returns.
“We see significant opportunities for long-term growth, but they will take years to bear fruit,” Mr. McKernan said. “We just think it’s going to be a lot easier to make those investments ... in a private setting.”
Without giving details, he said the company’s growth strategy includes opening new locations in the United States as well as Asia, Latin America, and Europe; finding new delivery methods, namely online courses; and adding academic programs to its current offerings in art, business, education, electronics, and information technology, among other fields.
Providence Equity Partners and Goldman Sachs will pay $43 per share in cash for the company. The average share price during thepast 30 trading days was $34.02. The company’s stock closed at $41.64 on Monday, up $4.66 in heavy trading.
Besides needing the approval of the Education Department and regional accreditors, the deal also requires the permission of shareholders and state licensing boards. A review by the Education Department is standard when institutions that participate in federal student-aid programs change hands.
Given that this is the first buyout of a publicly traded higher-education company and that some $2-billion of the purchase price will be financed by debt, company officials have already had “initial discussions” with the Education Department about the review, Mr. McKernan said. He expressed confidence that the buyout would be approved to allow the deal to close “within the next several months.”
Education Management has been one of the better-run publicly traded companies in an industry beset by scandal over the past year. One of its only black marks came in December when an accreditor, the Southern Association of Colleges and Schools, placed the Art Institute of Dallas, which is owned by Education Management, on probation for 12 months.
After monitoring the institute for two years, the accreditor had found it still did not comply with institutional-effectiveness standards requiring it to identify expected outcomes for educational programs and support services. As of October, about 1,300 students were enrolled on the Dallas campus, which is one of the company’s 31 Art Institute colleges.
After the announcement on Monday by Education Management, several analysts who follow for-profit colleges said the buyout could lead to other takeovers and consolidation in the industry.
The deal also comes on the heels of a major regulatory change that makes many for-profit colleges more attractive to investors. Congress recently eliminated the so-called 50-percent rule, which prevented colleges that enrolled more than 50 percent of their students at a distance or provided more than half of their courses via distance education from participating in federal student-aid programs.
“We believe this deal will provide investors with renewed interest in the group, particularly for companies like Career Education Corporation, Corinthian Colleges Inc., and Apollo Group Inc.,” Gregory W. Cappelli, of Credit Suisse First Boston, wrote in a research note.
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