Laureate investors say buyout falls short

Management offer `flawed' by conflict

February 22, 2007|By Hanah Cho | Hanah Cho,Sun reporter

Laureate Education Inc.'s third-largest institutional shareholder said yesterday that it will not support the Baltimore company's current $3.8 billion buyout agreement, saying that the price is "grossly inadequate" and that the deal is "flawed by clear conflicts of interest."

John D. Britton and James R. Berman, principal and general counsel of Select Equity Group Inc., respectively, said in a letter to Laureate's independent directors that they would not support the transaction because the $60.50 per share offer is insufficient.

They also questioned the evaluation process of the proposal to sell to a group led by the company's chief executive officer. Noting that they have "significant reservations" about the management-led buyout, Britton and Berman said, "We are concerned that the evident conflicts in this case have resulted in a deal that is unfair to long-term shareholders, and we urge the board to reconsider."

Select Equity, a New York hedge fund that began investing in Laureate in 2003, owns 3.67 million shares of Laureate's 51.4 million outstanding shares, representing 7.14 percent, according to financial filings.

Executives at Select Equity could not reached for comment yesterday.

Laureate, an operator of online and foreign universities, announced last month that it had agreed to be bought by a group of investors - led by Chief Executive Officer Douglas L. Becker - in a deal worth $3.8 billion, including debt.

The transaction is considered the largest buyout deal in the for-profit education sector.

The offer represented an 11 percent premium over the price of Laureate's shares at that time. Since the announcement, shares have traded between $59.46 and $60.80. Laureate shares rose a penny to close at $59.56 yesterday on the Nasdaq.

Britton and Berman argued several points in calling for a higher valuation of the company, including the strength of the company's business, expectations of future earnings based on the company's estimates and concerns over an inherent conflict of interest in a management-led buyout.

The two men said that three of the six companies Laureate competes with "have flat to declining earnings." Strayer Education, which they said is "the only company with revenue and earnings growth ... approaching Laureate's," trades at 24 times its 2008 estimated earnings.

Yet the buyout offer is 10 percent below the value of Laureate's "underperforming" competitors and 19 percent below the value of Strayer.

For the first nine months of 2006, Laureate reported a profit of $49.3 million on revenue of $799 million.

Britton and Berman also noted Laureate's bright growth potential, particularly in its international markets. Laureate has 240,000 students online and at about 58 campuses in Latin America and Europe.

Britton and Berman also pointed to statements by Laureate Chief Financial Officer Rosemarie Mecca in which she said the company expects $2 billion in annual revenue and earnings of $5 per share by 2010.

The two investors contended, too, that an inherent conflict-of-interest exists in management-led buyouts, with the buying group trying to get the lowest price for the company.

In Laureate's case, Britton and Berman contended that a special committee's decision to authorize Becker to seek financial partners to craft higher offers creates an "obvious conflict of interest between public shareholders and the buyout group."

Chris Symanoskie, Laureate's director of investor relations and corporate communications, said yesterday that the company welcomes shareholder comments.

At the same time, Symanoskie said "the board of directors had unanimously approved the transactions, and earnest opinions were provided by a few organizations, including Morgan Stanley and Merrill Lynch."

hanah.cho@baltsun.com

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