Educate gets $344 million buyout offer

Proposal by top managers, private equity partners to run ailing tutoring business welcomed by some

September 26, 2006|By Hanah Cho | Hanah Cho,Sun reporter

Educate Inc. said yesterday that its top management and others proposed to take the company private by paying $8 a share, or about $344 million, in a move that could mark the latest reincarnation for the Baltimore-based operator of Sylvan tutoring centers.

The buyout offer comes just two years after Educate became a public company by selling shares on the Nasdaq. Several analysts said yesterday that they expect the deal to go through as the company tries to turn around its struggling tutoring business. And they said the purchase offer of $8 a share is reasonable considering the company's recent challenges.

"The company has been undergoing operational issues over the last year, so given that there is no real clear timeline as to when the turnaround will happen, [the private buyout] makes sense," said Amy Junker, a senior research analyst for the education services industry at Robert W. Baird Co. Junker does not own any Educate stock.

Educate stock rose 15.16 percent, or $1.07, to close at $8.13 on yesterday's news.

The purchase price represents about a 13 percent premium over Friday's closing price of $7.06. The company has 42.98 million outstanding shares.

During the past 12 months, the stock has been trading between $5 and $15.

The stock was priced at $11 a share when Educate went public in September 2004.

Educate said its board of directors is reviewing the buyout offer from Chairman and Chief Executive Officer R. Christopher Hoehn-Saric; President and Chief Operating Officer Peter J. Cohen; Christopher J. Paucek, president of Educate Products; and Sterling Capital Partners. Also, some partners and co-investors of Sterling, including Citigroup Private Equity, are part of the group that made the buyout proposal.

Sterling Capital Partners is the buyout arm of Baltimore-based private equity group Sterling Partners. Hoehn-Saric and Douglas Becker, the chief executive of Educate's former parent, co-founded Sterling Partners.

Hoehn-Saric declined to comment beyond yesterday's statement regarding the offer. The company did not provide a timeline for the proposal.

If approved, Educate would become part of a buyout boom. So far this year, the United States has posted a record $200 billion in buyouts, according to data by Thomson Financial.

In recent months, several for-profit higher education companies have been purchased by private equity firms, including Education Management Corp., the Pittsburgh-based operator of culinary, fashion and health management schools.

Bharat Jain, professor of finance at Towson University's College of Business and Economics, said buyouts allow companies to streamline and restructure operations without the quarterly pressures of Wall Street.

But internal pressures to be profitable can be just as intense under private equity groups, Jain said. That's because deal makers in a buyout usually take companies public or sell them for a premium to a third party, sometimes another private equity group, Jain said.

"Management has a significant ownership stake in the company, and the board consisting of the private equity group is focused on cost," he said. "They're trying to squeeze every dollar out."

If Educate's board of directors accepts the buyout offer, it would be the latest transformation for a company that was born through a complicated breakup of Sylvan Learning Systems Inc. Until 2003, Sylvan owned the tutoring centers and a network of universities around the world.

After an unsuccessful gamble on a venture capital fund for Internet education-related businesses, Sylvan Learning Systems in March 2003 sold its kindergarten-through-12th grade tutoring businesses to focus on higher education. It changed its name to Laureate Education Inc.

The tutoring businesses, which were sold to investment fund Apollo Management LP, became Educate Inc. Apollo Management is the company's largest shareholder with nearly 53 percent of its stock. Apollo controls four seats on the nine-member board of directors.

Educate has more than 1,000 franchise and corporate-owned centers across the country. The company has about 2,300 full-time employees and 6,450 part-time workers.

Since going public in 2004, Educate has undergone a series of changes to refine its business. It bought the well-known infomercial brand, Hooked on Phonics, to sell directly to consumers, and shed its unprofitable business that caters to troubled schools trying to improve student performance.

But in the past year, its Sylvan tutoring business has faltered with several missteps, including buying back a third of its franchise centers. That led to increased costs related to high turnover, retraining staff, advertising and possible relocation of the repurchased centers.

Since the beginning of the year, Educate stock has fallen about 40 percent. The company reported that earnings declined 57 percent in the second quarter that ended June 30 to $4.3 million, from $10 million in the corresponding quarter last year.

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