Sylvan IPO weighed for foreign unit

Firm may spin off successful overseas schools division

Loss in 4Q is 2 cents a share

Sylvan Ventures unit continues to be drag on earnings

February 22, 2002|By Andrew Ratner | Andrew Ratner,SUN STAFF

Sylvan Learning Systems Inc., the Baltimore education services company, told investment analysts yesterday that it is moving closer to spinning off its growing division of international universities as a separate stock.

The company, meanwhile, reported losses for the fourth quarter and the year, largely related to losses in its venture-investing subsidiary.

Sylvan reported yesterday a net loss of $796,000 for the quarter that ended Dec. 31, compared with a gain of $14 million for the corresponding period in 2000. That translated to a loss of 2 cents a share compared with a gain of 38 cents a share in the fourth quarter of 2000.

Revenue was $137.4 million, up from $97.7 million in the year-earlier period.

Earnings per share in the fourth quarter, excluding Sylvan Ventures, were 24 cents, in line with the company's earlier guidance, and up from 18 cents for the fourth quarter in 2000.

For 2001, Sylvan reported a loss of $17.4 million, down from a gain of $305.2 million in 2000. That equated to a loss of 46 cents a share in 2001, compared with a gain of $7.02 a share in 2000.

Revenue was $484.8 million in 2001, an increase of 54 percent from $314.7 million in 2000. The loss from continuing operations was $17.4 million or 46 cents a share for 2001. That compared with a loss of $1.6 million, or 4 cents a share, in 2000.

Excluding Sylvan Ventures, earnings per share were 67 cents in 2001, up from 53 cents in 2000 and in line with analysts' expectations.

Sylvan officials said losses in Sylvan Ventures should shrink in the next few years because speculative acquisitions have slowed.

They also maintain - and analysts who follow the company generally concur - that last year's $35.5 million loss in Sylvan Ventures does not negate the long-term strength of the company's core businesses.

Revenues increased in the company's main service areas, including tutoring for children after school at roughly 900 centers in North America and Asia.

The company's greatest revenue gain came from its web of international universities. The company began acquiring higher-education institutions in Europe and Latin America in 1999.

Revenue for that subsidiary totaled $200.2 million in 2001, more than triple the total of $60.9 million in 2000.

The company recently added branch campuses to its universities in Chile and Mexico. It also is in discussion with officials in India about plans to break ground for an information technology school there, the first it would build from scratch anywhere.

"The international university business is the key growth driver for the company. Both revenue growth and profits were higher than expected," Jeffrey M. Silber, an analyst with Gerard Klauer Mattison in New York, said yesterday.

Douglas L. Becker, Sylvan's chairman and chief executive officer, told analysts that the company would like to spin off the international universities and a chain of English-language tutoring centers it owns in a public stock offering as early as this year.

Such action would need to gain approval by federal regulators.

Shares in less than 20%

If that happened, the company would probably offer shares in less than 20 percent of the new company.

Existing shareholders would retain more than 80 percent and eventually receive a share in the spinoff for every Sylvan share they own in a tax-free distribution.

The new company, with all but 40 employees based overseas, would remain in Baltimore, Becker said.

"It's something we're very seriously considering for this year," Becker said in an interview after a conference call with analysts.

Becker said he isn't troubled by the Sylvan Venture losses even though they weigh down his company's bottom line. Sylvan Venture's losses should dry up by 2003, he said.

Sylvan hopes in the long run that the subsidiary's wins, such as last fall's sale of a stake in Classwell Learning Group, an online company, for $24.7 million, outweigh losses, such as last summer's bankruptcy of Caliber Learning Network Inc., a corporate training company.

Sylvan Ventures also announced this week an investment of $8 million to assume majority control of Walden University, which offers graduate-level training online.

"Investors have clearly looked through that issue," Becker said of the venture losses. "The stock would be at 8 or 9 if investors didn't."

Sylvan's stock closed down 30 cents yesterday to $23.60 a share. That compares with a 52-week high of $28.99 in August and a 52-week low of $15.85 in April.

`Wait-and-see mode'

Trace Urdan of ThinkEquity Partners, a San Francisco firm that tracks education companies, said that analysts are in a "wait-and-see mode" on Sylvan Ventures' losses.

"By and large, investors look at the stock with venture losses excluded," Urdan said. "Sylvan sees the value in it more clearly than investors do, but if you look at what they've done well historically, it's to identify businesses. They're really building businesses there."

Sylvan's original business - tutoring at the grade-school level - is expected to gain a boost from President Bush's sweeping $26 billion plan for education reform.

Public school spending on outside tutoring, less than $70 million nationally, could balloon to $1 billion in a few years under the "No Child Left Behind" Act.

Parents whose children are in schools that fail to meet government standards for several years would have aid available for outside tutoring.

Said Becker, "That will add jet fuel to that business."

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