Laureate gains full control of Walden U

Cash-stock deal gives company total say over fastest-growing division

September 18, 2004|By Tricia Bishop | Tricia Bishop,SUN STAFF

Laureate Education Inc., a Baltimore-based higher education provider, yesterday acquired full control of an Internet-based college that is its fastest-growing subsidiary.

Laureate, formerly known as Sylvan Learning Systems, announced yesterday that it acquired the 49 percent of Walden University it didn't own for $109 million. The sum included $19 million in cash and 2.5 million shares of Laureate stock worth $90 million.

In 2000, Laureate bought 41 percent of Walden, and it increased the percentage to 51 percent in 2002. Last year, the company cut loose its grade-school tutoring division and in May changed its name from Sylvan to reflect its new focus on higher education.

As partial owners of Walden, Laureate executives had to negotiate with minority holders every time they wanted to make a change or form a partnership. "Today's acquisition of the remaining shares now gives us complete control," said Douglas Becker, chairman and chief executive officer of Laureate.

However, acquiring the second half of Walden cost more than double the first half - partly because Walden's enrollment grew tenfold from the time Laureate first invested in it four years ago.

Becker said the deal was unusual in that he is "generally not excited about using shares to acquire businesses," but was driven by the sellers, who weren't ready to cash out.

"Our discussion revolved around the fact that [the sellers] could continue [to have a say] through Laureate shares," Becker said.

Since 1970, Minneapolis-based Walden has offered degrees through distance education, most recently over the Internet. It has nearly 11,000 students and is growing faster than Laureate Education as a whole.

The field of for-profit education has met with controversy recently. Last week, the University of Phoenix paid a record $9.8 million in fines to the U.S. Department of Education, which accused the school of paying recruiters by commission and pressuring acceptance of unqualified students. Two other for-profit schools, Illinois-based Career Education Corp. and California's Corinthian Colleges Inc., are being investigated for alleged fraud and record manipulation. Both operate a network of adult-education schools and online courses.

"There have been some regulatory and legal issues at a couple of the competitors, but I don't think that should impact the market for online education," said Gary Bisbee, an education analyst and vice president of equity research at Lehman Brothers in New York. "As time goes by and more and more offerings are available and more and more people are taking [online courses], the business is being viewed increasingly as a very legitimate offering for working adults and nontraditional college students."

While most of Laureate's business comes from 38 campuses abroad in Mexico, Chile and Europe, the online portion - led by Walden - is the fastest-growing.

"Walden University is the centerpiece of that, absolutely dead center," said Paula Singer, president of Laureate Online. "We see it as our engine for growth over the next couple of years."

The company also plans to acquire other businesses in which it has a stake to cut out the haggling with other shareholders. "Generally, we're big on simplifying our business," Becker said.

Bisbee, the analyst, said the Walden acquisition will help the company financially and strategically.

"The company now owns 100 percent of the asset, and since it's the fastest-growing piece of Laureate and also, I think, has the potential in the future to be most profitable, it's obviously better to own 100 percent of that than 51 percent," he said, adding that the control will also benefit the company's long-term, online strategy.

"Over time, the environment for these businesses continues to improve," he said. "The issue to watch closely longer term is competition because the financial model of the online [education] business is so attractive. ... Walden is clearly one of the stronger offerings available today."

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