Too bad shareholders won't be able to cash in on privatized companies' profitable futures

January 31, 2007|By Jay Hancock | Jay Hancock,Sun Columnist

Two days. Two deals. One town: Baltimore. One industry: for-profit education. One outcome: Public shareholders are left behind.

Corporate siblings Laureate Education and Educate Inc. say it's just a coincidence that each company's management proposed at almost the same time to take them private and that announcements about done deals came 10 hours apart.

This seems a stretch, especially since both outfits operate from the same building, are run by some of the same people and are tapping some of the same financiers, Sterling Capital and Citigroup Private Equity.

Apparently Doug Becker the Educate director had no idea that Doug Becker the Laureate chairman and Doug Becker the Sterling partner were thinking about doing a Laureate buyout.

Communication, guys! It's an important educational building block.

One company is on a roll. The other is a rehab project. But both have good prospects. Oops - make that "had" good prospects, at least as far as most shareholders are concerned.

Educate's main business is Sylvan Learning, whose branches tutor primary and high school kids.

The company went private once before, in 2003, when Apollo Management and other investors bought it from Laureate's predecessor for something like $250 million, not counting debt assumption. A year later it went public as a stand-alone concern, and Apollo sold fewer than a third of its Educate shares for $110 million, a lovely profit.

The stock went from $11 to $16 by early 2005, but then Educate's grades crashed. Somehow the nation's leading tutoring company failed to take full advantage of the gusher of "No Child Left Behind" tutoring dollars from Washington. It spent big money on a Web site but forgot to make sure it ranked high on Google searches. It overpaid to buy out franchisees.

By last summer the stock was $6, and shortly afterward CEO Christopher Hoehn-Saric and other executives disclosed their desire to take the operation private again. On Monday the board announced it had accepted an offer on the table since September by Hoehn-Saric's group to pay $8 a share - half what the company was worth less than two years ago.

Laureate, on the other hand, is doing terrifically.

The company offers undergraduate and graduate degrees online and on 58 campuses around the world. Its enrollment popped 27 percent to 240,000 for the quarter ending in September, compared with the same period a year earlier.

It's the perfect globalization play. Laureate sells one of the planet's most sought-after products - American-style higher education - to a growing world economy that can put it to great use.

The chief of Procter & Gamble in Mexico and Central America just quit to work for Laureate; you don't hire that kind of talent if you're a company with bum prospects. Profits are rising, and Laureate's stock had gone from $30 in 2004 to $54 right before the buyout was disclosed on Sunday.

"We see many exciting opportunities ahead for Laureate," said CEO Becker in the news release announcing the buyout.

Too bad the public shareholders, for whom Becker is supposed to be working, won't share in the excitement. They're getting cashed out at $60.50 a share. That's a modest premium over what the stock was fetching, but it's nowhere near what this company will be worth in five years.

Educate, too, will see better days. Its problems seem fixable, although it's still hard to find Sylvan on a Google tutor search. The company is launching a new ad program.

The Hooked on Phonics product it bought should help revenue. Educate is addressing management-training problems at its Sylvan centers, which was one reason for the stock's dive.

It's a great turnaround candidate, but $8 a share is all Educate's public investors will ever see.

It's true that Apollo, which could have blocked the deal, has signed off. But Apollo's cost per share was much lower than the public's, and it probably wants to move onto other things.

The most disturbing thing these companies have in common is not the timing of the buyouts. It's that the upside at both Educate and Laureate will be enjoyed by private-equity buyout players and current management.

Oh, it's all legal. "Independent" directors at both companies approved the deals. They'll buy "fairness" opinions from Wall Street. Sure, there's a risk that the buyouts will flop and everybody will lose money.

But the people who know most about these companies' potential - management - aren't selling out. They're sticking around. Shame you can't, too.

jay.hancock@baltsun.com

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