Sylvan leads Nasdaq market day after news it's selling unit

Company's shares go up by 30 percent, or $3.44, in frenzy of trading

March 12, 2003|By Andrew Ratner and Stacey Hirsh | Andrew Ratner and Stacey Hirsh,SUN STAFF

Baltimore-based Sylvan Learning Systems Inc. led the Nasdaq stock market in gains yesterday, jumping 30 percent after it astounded investors and employees by announcing that it is selling its signature tutoring business to concentrate on running universities overseas and on the Internet.

The company's shares rose $3.44 to close at $14.87. The stock traded furiously throughout the day on the news, with more than 7.5 million shares exchanged - 27 times the total on a typical day.

Traders who had "shorted" the stock - anticipating that it would continue its nearly yearlong slump - scrambled to "cover," or buy shares to replace those they had borrowed from their broker to sell in hopes they would fall in value.

"It's been flickering on my screen like a technology stock," said Trace Urdan, an analyst with ThinkEquity Partners in San Francisco.

People who follow Sylvan, who work there or invest in the company were not surprised by its announcement late Monday of plans to carve up and sell off parts of a venture subsidiary that failed to develop profitable education and high-tech spinoffs as well as once hoped.

But many were mystified by the company's decision to unload its prolific tutoring chain, by far the leader in that business.

Douglas L. Becker, Sylvan's president and chief executive officer, told analysts yesterday at a conference in Phoenix, that an internal study of how to dissolve the money-losing venture subsidiary led to a conclusion that higher education is a better long-term approach for Sylvan than tutoring.

The study also revealed that Sylvan's higher-education operation is more efficient than the sales-intensive tutoring unit, producing two-thirds of the company's revenue with only a third of the corporate overhead costs, he said.

Sylvan intends to sell its kindergarten to 12th-grade tutoring centers and a year-old Internet-based tutoring offshoot called eSylvan to Apollo Management LP for a price it estimated at $275 million to $300 million.

Apollo and Sylvan were the main investors in the Sylvan Ventures subsidiary.

Sylvan executives dedicated to the tutoring business will run it for Apollo, including R. Christopher Hoehn-Saric. He built Sylvan with Becker, a former schoolmate.

Sylvan, in turn, will remain publicly traded but with a new name and stock symbol in the next year. It will focus wholly on the company's six colleges in Europe and Latin America and its online universities, Walden and National Technological University. Becker will continue to run the company.

Because of the change, Sylvan updated its outlook yesterday for 2003. It expects earnings from continuing operations of 80 to 82 cents a share on $450 million to $475 million in revenue. Becker said the long-term nature of college enrollment also made him confident enough to provide guidance for next year of earnings exceeding $1.12 per share.

The old and new Sylvan will remain in the company's 2-year-old headquarters in Baltimore's Inner Harbor East.

The tutoring side employs about 430 people in Baltimore and about 1,800 full-time overall.

The higher-education side employs about 130 people in Baltimore and 4,000 full time at 24 campuses scattered across Spain, Mexico, Chile, France and Switzerland.

Although praise for Sylvan's maneuver appeared widespread, some described the move less as a brainstorm than as an intricate Houdini escape from a straitjacket that the company had unwittingly wriggled into.

For months, Sylvan has tried to untangle its partnership with Apollo in Sylvan Ventures, whose losses of $100 million plus were eroding confidence and value in parent company. Before yesterday, Sylvan shares had languished around $12.

$70 million more

Urdan, the ThinkEquity analyst, estimated that Sylvan should have earned an additional $70 million for its dominant tutoring business, but its tie with Apollo restricted what it could do, he said.

"Apollo is getting a sweetheart deal on the K-12 assets, but it's still a positive for current shareholders," Urdan said. "I would expect the stock to continue to go higher."

"They've been struggling with this for a long time," said Urdan, adding that the ventures debacle had stymied other ideas for Sylvan such as selling education software like the popular Leapfrog line.

"The truth is tutoring was a slower-growth business and those guys are impatient and ambitious. Postsecondary is higher-growth, but also higher- risk, and that's Doug Becker all the way. That's what he likes."

Becker disputed the notion that he got a discount price for a business he's spent nine years building, but not everyone was as convinced.

"Apollo got a good deal, but it's what Sylvan needed to do," said Richard Johnson, chief investment officer for Columbia Management Co. in Portland, Ore., one of the top institutional holders of Sylvan stock with 1.6 million shares. "It was the price of the mistakes they had made in the past."

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.