Educate stock up 9 percent in IPO

Sylvan spinoff's shares jump in trading after $49 million is raised

September 24, 2004|By Jamie Smith Hopkins | Jamie Smith Hopkins,SUN STAFF

The Baltimore-based parent of the ubiquitous Sylvan tutoring centers saw its stock price jump 9 percent in the first day of trading yesterday, after an initial public offering that netted the company about $49 million.

Educate Inc., which offers tutoring services in centers, online and, more recently, in schools, intends to use the proceeds to pay down the debt it incurred when it bought the businesses from another Baltimore company.

The stock, priced at $11 a share, hit the Nasdaq stock market at more than $12 shortly before noon and then edged downward before closing at $11.99.

The company sold 5 million shares, and its major owners sold at least 10 million. Educate was uncertain yesterday whether underwriters had exercised their option for up to 2.25 million additional shares. About 5.2 million shares changed hands again after the initial sale.

It was a coming-full-circle day for Sylvan, which returned to public ownership after more than a year as part of a privately held enterprise.

What used to comprise Sylvan Learning Systems Inc. has split into two publicly traded, Baltimore-based companies. The old Sylvan, restructuring after an unsuccessful foray into venture investing, sold its kindergarten-through-12th-grade operations in June last year to a New York investment group. The old Sylvan is now called Laureate Education Inc. and focuses on providing higher education abroad and online.

Educate arrives on the public scene as the IPO market is recovering from the dot-com collapse in 2000. Almost 150 companies have gone public this year, nearly twice as many as in all of last year.

Educate's performance looks fairly typical - the average IPO this year rose 10 percent on its first day, said John Fitzgibbon, who writes an IPO column for the industry publication Red Herring. But he still considers it "fantastic."

That's because the stock was priced below the $12 to $14 range the company predicted this week. Stocks that hit the market under the predicted range normally spook investors, he said.

"It got off to a little bit of a jackrabbit start," he said.

R. Christopher Hoehn-Saric, Educate's chief executive and chairman, said, "We're happy with the results."

Hoehn-Saric said "the great majority" of the cash the new company has produced since it went private has gone toward debt repayment. The cash from the IPO will reduce the balance by almost 30 percent.

"That's very meaningful in terms of our ability to grow," he said yesterday, sitting in his glassy Inner Harbor East office.

Educate expects to franchise 35 to 45 centers a year and open company-owned sites in metropolitan areas that appear to be under-served, according to its filings with the Securities and Exchange Commission.

More than 1,000 Sylvan centers are spread across North America, most of them franchises. Educate also has about 940 centers under the name Schulerhilfe in Germany and Austria.

Another part of the company's business is supplemental education - tutoring in schools - a market that has boomed with the money behind the federal No Child Left Behind Act.

"I view that as icing on the cake," said Alex Paris Jr., director of research for Barrington Research in Chicago. "I think the core traditional business of selling tutoring services to parents is a high value-added proposition. ... It's definitely a great brand name."

Name recognition will matter because the in-school services part of the market is getting crowded.

"My guess is that market is somewhere around $20 [billion] to $30 billion - and expanding - a year," said Henry Levin, director of the National Center for the Study of Privatization in Education at Columbia University. "The margins are pretty substantial."

Laureate Education decided to sell off the K-12 businesses and stick with postsecondary education because it expects higher growth from higher ed. Hoehn-Saric, who left the company to run Educate, said yesterday that the split was about focusing, rather than a signal that the K-12 market is not as attractive.

"It was a great company with a strong historical track record of performance," he said. "We felt there was opportunity to continue to grow."

Revenue was about $170 million in the first half of the year, up one-third from $128 million during the year-earlier period.

Goldman, Sachs & Co., Merrill Lynch & Co., JPMorgan Chase & Co., Banc of America Securities LLC, Baltimore-based Legg Mason Inc. and ThinkEquity Partners LLC underwrote yesterday's offering.

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