Potential buyers mixed on Educate

CEO's buyout offer drew tepid interest

Potential Educate buyers mixed

March 13, 2007|By Hanah Cho | Hanah Cho,Sun reporter

Five other potential buyers expressed interest in making bids for Educate Inc., but none would match or exceed the $8 a share offered by a group led by its chief executive officer, according to a preliminary proxy filed last week.

Of the five unnamed parties - a competitor, two private equity groups and two educational publishing businesses - three declined to make bids given the Baltimore company's struggling performance.

Two others said they would be interested in pursuing a transaction at a lower price, according to the proxy and other documents filed with the Securities and Exchange Commission.

The bidders were reacting to a management buyout offer announced in September. In the end, the management offer led by Educate Chairman and Chief Executive Officer R. Christopher Hoehn-Saric was unanimously approved by the board of directors in late January.

Hoehn-Saric and Douglas L. Becker, an Educate director and chief executive officer of Laureate Education Inc., abstained from the vote.

Hoehn-Saric and Becker - longtime friends who once ran Sylvan Learning Systems Inc., which they later broke up to form Educate and Laureate - also are managers at Sterling Capital Partners, which is helping to finance Educate's buyout. The two also recused themselves from the board's deliberations, according to the proxy.

"The board believes that the [deal] is substantively and procedurally fair to and in the best interests of our minority unaffiliated stockholders," the proxy said.

Shares of Educate lost 11 cents, or 1.4 percent, to close at $7.72 yesterday on Nasdaq.

Members of Educate's board of directors could not be reached or declined to comment yesterday.

The company is best known for its Sylvan tutoring centers. But as the tutoring business began deteriorating last year, its board considered changes in the company's "strategic direction and roles of management," SEC documents revealed.

By August the stock had fallen below $6, and a month later, the board received the offer from Hoehn-Saric and other Educate executives to take the company private for $8 a share.

Including assumed debt, the buyout values Educate at $535 million.

Besides Hoehn-Saric, the buyout offer came from President and Chief Operating Officer Peter J. Cohen; Christopher J. Paucek, president of Educate products, and Sterling Capital. Also part of the buyout group are partners and co-investors of Sterling, including Citigroup Private Equity.

Under the deal, $290 million in debt financing would be provided by JP Morgan, according to SEC documents. And up to $300 million in equity would be provided by the management group, including $140 million from Sterling Capital, $140 million from Citigroup Private Equity and $20 million from Educate executives.

The deal requires shareholder approval. The company will schedule a shareholders meeting soon after the SEC approves its proxy, Educate Chief Financial Officer Kevin E. Shaffer said yesterday.

Apollo Management, the company's largest shareholder with nearly 53 percent of its stock, has agreed to vote in favor of the buyout. Apollo controls four seats on the nine-member board.

The transaction is expected to close in the second quarter of 2007.

The proxy and other SEC documents showed that as early as 2005, the company explored the possibility of a sale after being approached by an unnamed buyer. Although the company had "substantial preliminary discussions" with the buyer, such talks ended in early 2006, according to the proxy.

Also during 2005, Hoehn-Saric and Apollo representatives discussed Apollo's investment plans for the company, including Hoehn-Saric acquiring Apollo's stake. But those talks discontinued at the end of 2005.

Educate became a public company in September 2004 at $11 a share. The company was spun off in 2003 from Sylvan Learning Systems Inc., which renamed itself Laureate Education and focuses on for-profit universities.

Baltimore-based Laureate also announced in January that it agreed to be acquired in a management-led buyout in a deal worth $3.8 billion.

In the past year, Educate has been struggling at its Sylvan tutoring centers and more recently with poor product sales, including that of its Hooked on Phonics brand.

Analysts expect the deal to go through.

"Given the completion of a lengthy independent review process and the fact that 53 [percent] of Educate shareholders have entered a voting agreement to approve the deal, we think the likelihood of the deal reaching completion is very high," Goldman Sachs analyst Peter P. Appert wrote in a recent research report.

hanah.cho@baltsun.com

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