Educate sells flunking unit for $6 million

August 31, 2006|By Hanah Cho | Hanah Cho,Sun reporter

Educate Inc., the Baltimore company known for its Sylvan learning centers and the Hooked on Phonics brand, has found a buyer for the main piece of its No Child Left Behind division as it continues to shore up its struggling tutoring business and expand into educational products and media.

The shedding of the unprofitable Education Station unit, which caters to troubled schools trying to improve student performance, is the latest move by Educate to reposition itself. Unlike Educate's other businesses, the unit's services are not directly sold to consumers.

The sale "allows us to focus on our consumer business - the services we render in our learning centers as well as the products we deliver through Hooked on Phonics and Sylvan," said Kevin E. Shaffer, Educate's chief financial officer.

Knowledge Learning Corp., a privately held company best known for its KinderCare centers, said yesterday that it agreed to pay $6 million for Education Station.

Under the agreement, a portion of the purchase price is contingent on Education Station retaining 65 percent of its existing school contracts, according to a Securities and Exchange Commission filing.

Knowledge Learning, of Portland, Ore., also agreed to pay $10 million to license Educate's online tutoring software for four years and another $2 million for financial, human resources and information technology services under a one-year deal.

Educate will continue to provide No Child Left Behind services online because it can be offered through its Sylvan learning centers. The company has more than 1,000 franchise and corporate-owned centers across the country.

Education Station - with a staff of 500 nationwide - will stay intact under Knowledge Learning's School Partnerships division and remain headquartered in Baltimore, said Marcy Suntken, the division's president.

In the past school year, Education Station served 29,000 students in more than 80 school districts.

"I think the great thing about the joining of our organizations is that Education Station brings a lot to the table in terms of their background and experience, testing and assessment process, curriculum and parent-home connection," Suntken said.

The past year has been a transition period for Educate as it worked to broaden its business to counter its faltering core private-tutoring business.

Educate was spun off in 2003 from Sylvan Learning Systems Inc., which renamed itself Laureate Education and focuses on for-profit universities. Educate has about 2,300 full-time employees and 6,450 part-time workers.

Educate bought Hooked on Phonics last year and repackaged the well-known infomercial product into a retail brand. Its products are sold at national retailers. At the same time, Educate announced it would sell Education Station.

Earlier this year, Educate also entered into an agreement to co-produce the PBS children's series Reading Rainbow.

The company also announced a series of management and other changes to turn around its tutoring business, including increasing its sales staff, ensuring better customer service and expanding financing programs to bolster sales. The company also is exploring different tutoring offerings to reach high- and low-end customers.

"They're trying to broaden out their market as the core business at least for now isn't growing from a volume perspective all that substantially," said Jerry R. Herman, an analyst at Stifel, Nicolaus & Co., which does not own Educate stock.

The company reported that earnings declined 57 percent in the second quarter to $4.3 million, from $10 million in the quarter last year.

Education Station also was not profitable. In the second quarter, the unit lost nearly $1.6 million on sales of $8 million, according to an SEC filing.

More than $600 million was spent on No Child Left Behind tutoring services in the last school year, according to the Education Industry Association, a trade group in Rockville.

The spending, however, is only a fraction of the $2 billion available in the market. Analysts say parents are not signing up their children who are eligible for free tutoring, and vendors are facing increased demands to meet accountability.

"What we've seen in that business is a growing market but a very volatile market," Herman said. "The vendors are competing with schools and school districts, who are offering remediation."

Shaffer, Educate's CFO, said the $6 million price for Education Station would "roughly cover the book value for what we had for the business."

Educate's stock rose 74 cents, or 11.53 percent, to close at $7.16 yesterday.

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