Sylvan Sees Shinier Prospects As a Higher Education Operator

Sylvan Learning Systems Inc. is graduating. Arguably the world’s best-known provider of tutoring and supplemental schooling for elementary and high school students, Baltimore-based Sylvan is shedding that business to become a global pure play in private colleges and universities. The move up the education ranks reflects a sobering reality that Sylvan encountered in trying to serve students of all grades and ages. Although the elementary-to-high- school segment and the higher-education field can be loosely classified under the education umbrella, they are, in fact, two separate businesses. Chairman and CEO Douglas Becker told analysts in unveiling the restructuring in early March that ownership of the two businesses had resulted in a conglomerate discount for Sylvan’s shares. Differences between the two businesses can be measured in terms of strategies, operations, marketing, growth rates, and returns. Chris Symanoskie, director of investor relations, points out that the two segments even target separate markets. The college and high school services – called K-12 by Sylvan – markets to mothers and families while the post-secondary business works primarily with young adults in the 18-to-22 age grouping. But the most dramatic difference rests in the growth prospects. While the K-12 business is projected to grow at 10% to 15% a year for the foreseeable future and generate stable cash flows it can’t touch the forecast expansion in post-secondary operations, where top-line growth is projected in the 20% to 25% range with operating margins in the 12% to 13% area. To divorce the businesses, Sylvan is selling the K-12 operation to its leading stockholder, Apollo Management, for $117 million in cash, a $55 million subordinated note, and other considerations, including retirement of debentures owned by Apollo. In addition, the company will wind down its unprofitable Sylvan Ventures unit, which had been launched to operate specialized education services, and will adopt a new name when it goes strictly higher ed. Becker says the split-up would complete a study process whose results so startled Sylvan managers and directors that they argued loudly for accelerating the separation. Sylvan entered the higher-ed market in 1997 with the acquisition of Mentor, an online service specializing in master’s degrees for teachers, and has expanded through acquisition and organic growth in both the U.S. and overseas. The company had been planning an IPO for the post-secondary business but had to hold up because of sour conditions in the new issues marketplace. However, a unique strategic study indicated that Sylvan would be better off if it acted before the market turned more favorable. The study was conducted by a committee of independent board members advised by Credit Suisse First Boston and Piper Jaffray. It found, for openers, marked differences in the growth rates. But almost as telling was that the slower-growing K-12 operation was a “disproportionately large user of corporate overhead,” according to Sylvan CFO Sean Creamer. He says that the K-12 operation was being allocated two-thirds of general and administrative costs while the post-secondary operations were becoming the dominant portion of the company. Acquisitions as entry vehicles As a pure play in higher education, the company emerging from the restructuring would have operations in the U.S. and five countries overseas. The American business will focus on online services, or “distance learning.” Operations in foreign countries are conducted through campus-based institutions. Symanoskie notes that acquisitions will be used to enter additional countries through purchases of campus-based schools. According to Symanoskie, total enrollment in the U.S. should grow about 1% a year, but the growth rate abroad is expected to run three times faster than that. Creamer says that the independent higher-education business should grow revenues by 23% to 25% in 2004 and generate a margin improvement in the range of 180 to 200 basis points. That would fuel operating income growth of more than 40%. “We expect to be able to replicate that in 2005,” he adds. Investors have thus far rewarded Sylvan for the restructuring, with the stock selling on Nasdaq at just over 11 at the time the overhaul was announced and at more than 17 by early April. Copyright 2003 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com