Edison Schools looks to Philadelphia deal

For-profit education-management company losing money so far

August 28, 2001|By Martha Woodall | Martha Woodall,KNIGHT RIDDER/TRIBUNE

PHILADELPHIA - Edison Schools Inc., a controversial for-profit education company, loses money. The company says it can become profitable if it increases the number of public schools it manages.

Philadelphia may be about to give Edison that opportunity.

Pennsylvania Gov. Tom Ridge has hired the company to study the Philadelphia School District and devise a plan for improving its academics and finances. And in two months, Ridge will decide whether this firm, with which he has political ties, should manage some or all of the Philadelphia public schools. The decision could be worth hundreds of millions of dollars to Edison.

Some financial analysts wonder whether awarding a publicly traded company a $2.7 million contract to study a potential takeover of the city's public schools is akin to "putting a fox in charge of a henhouse."

And academic experts wonder whether the Edison model ever will work. Even the company acknowledges the doubts.

In an Aug. 3 filing with the Securities and Exchange Commission, Edison warned potential investors: "We have not yet demonstrated that public schools can be profitably managed by private companies, and we are not certain when we will become profitable, if at all."

Founded in 1991

Edison was founded in 1991 by maverick entrepreneur H. Christopher Whittle. A year later, he added the marquee presence of Yale University's former president, Benno Schmidt, now Edison's chairman, to help develop the curriculum.

The Manhattan-based company raised $232 million in venture capital before its initial public offering in November 1999.

Microsoft co-founder Paul G. Allen invested $71 million through his Vulcan Ventures Inc. in 1999, although he has since reduced the size of his stake.

Other large private investors include Richmont Leeds, J.W. Childs Associates L.P., J.P. Morgan Chase & Co., and Investor AB, a Swedish holding company.

But despite the heavy infusion of capital, including $265.5 million raised in its three public offerings, Edison reports that its accumulated deficit since November 1996 totaled $144.8 million as of March 31.

While Edison's stock has fallen substantially from its all-time high of $38.75 on Feb. 8, news of the Philadelphia contract gave it a bounce. It closed yesterday at $18.01 in trading on the Nasdaq.

Financial viewpoint

The losses do not yet disturb the financial community.

"The fact that they are not yet profitable is immaterial, provided they are on plan and meeting their numbers," said Peter J. Stokes, executive vice president of Eduventures.com, an independent research firm in Boston that focuses on the education market.

"The top line is that Edison without question is the best-funded and most formidable operator of for-profit schools in the nation," Stokes said. "They have the largest number of schools, they have solid management, and they have demonstrated in many districts that they can operate schools that enhance the learning experience for kids."

In January 1998, Whittle said Edison would be profitable once it had contracts to manage 75 schools. But as time passed, Edison kept revising the number. At one point, it was 250 schools. Then 440.

Edison now manages 113 public schools around the country, including three in Baltimore, Furman L. Templeton, Gilmor and Montebello elementary schools.

Financial analysts who have been touting the company's stock say that if Edison succeeds in getting even some of Philadelphia's 260 schools, the company will achieve the economies of scale that will make it profitable at last.

But skeptics question that notion. They charge that the number will never be reached because it is an illusion. And they wonder how a company whose losses have widened even as its revenues have grown can expect to make money managing a part of a district that is facing a $216 million deficit.

"My own view is that the economies of scale in this industry are pretty tough for the for-profits," said Henry M. Levin, director of the National Center for the Study of Privatization in Education at Teachers College at Columbia University. "There is not a lot of evidence in the economics of education of the economies of scale of that sort."

Edison CEO Whittle says the scale argument is valid.

"We are, and have been for a long time actually, profitable at the school level," he said. "We just don't have enough of them [schools] at this particular point to cover the central administrative costs."

$2.7 million contract

The $2.7 million no-bid contract that Ridge awarded the company recently contains no guarantees for Edison. The contract gives the company two months to study the Philadelphia district and come up with improvement options. Edison said it planned to subcontract some of the work to leading consulting firms.

Yet, financial analysts and academics who follow Edison say the company's involvement in any improvement plan is all but assured. Edison, after all, is overseeing the study.

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