With Dealmakers, School is Still in Session
The M&A scene had been quiet on the education front for quite some time, but savvy dealmakers are once again exhibiting a studious interest in the space.
Whether it's in the corporate training and certification space, or because they see opportunities to combine traditional learning methods with new technology, private equity firms and strategic acquirers flush with cash are beginning to jockey for position.
Between January and October 2012, some 298 education deals took place worldwide, according to data provided by Dealogic. That's roughly a hundred more than 2011's total and it just passes the tally for 2010. Within that same timeframe, deal value amounted to $4.5 billion, more than double compared to the value that amassed in 2011.
Twelve education companies were sold in November alone, including Learning Seat Pty Ltd., a Melbourne, Australia-based developer of electronic learning courses, which was sold to the Riverside Co.-the private equity firm's 300th acquisition. Riverside quickly followed up with another education deal, this time a bolt-on acquisition for portfolio company OnCourse Learning.
Digital University, an online bank and credit union regulatory-compliance training tool, headquartered in San Diego, provides online training courses for banks, credit unions and utility clients.
"We're building up the sector, growing companies and helping school districts save money," says Scott Gilbertson (pictured), a principal at Riverside's Chicago office.
Riverside is not alone. Another private equity firm, London-based Apollo Global Management LLC's acquiring of McGraw-Hill Cos.' education unit for a $2.5 billion sale, was the biggest of the education transactions in 2012. The deal, which McGraw agreed to on Nov. 26, took place after more than a year of negotiations and bid offerings.
A slate of financial sponsors showed up to the negotiation table, including Thomas H. Lee Partners LP, Providence Equity Partner, Bain Capital and Cengage Learning Inc., the No. 2 U.S. college textbook publisher backed by Apax Partners LLP and Omers Capital Partners.
McGraw-Hill Education, which had revenue of $2.3 billion and operating income of $260 million in 2011, is a distributor of textbooks in 65 languages across 157 countries. About 18 percent of the company's revenue is international, with digital-related solutions accounting for over 20 percent.
The returns in the space are attractive, says Gilbertson. McGraw began "selling off the education business to create shareholder value, not because they're scared of the sector."
In many ways, however, folks still are. With unemployment still high, prospective students remain wary of the value post-secondary schools present, noting the debt load being amassed by the class of 2013. Budget cuts, regulatory uncertainty, government guidelines and mounting tuition costs aren't doing the sector justice, either.
One issue was lack of clarity regarding the 2011 gainful-employment guidelines. The program was designed to encourage underperforming institutions to lower tuition, so students could take on less debt and be better prepared in the case of unemployment. Then there was also the 90-10 rule, which Congress passed in 1998, as a means of making sure that no school could be completely funded by federal dollars. In order to avoid crossing that threshold, schools and universities began diversifying their business to make sure 10 percent came from non-federal sources.
That created an overall chill in the post-secondary space, according to Berkery Noyes adviser Peter Yoon (pictured). But it also led to the current land-grab of education assets in sub-sectors like "corporate and professional training."
"Spending on training and perks to retain existing employees has become more important on the corporate level," Yoon explains, adding that in the preschool through 12th grade, the sector is shifting from print to digital tools, improving teacher efficacy and interaction with students. And so, buyers began targeting companies that combined content and digital tools.
"We've seen a lot of activity from technology-focused companies that look to help students throughout their lifecycle," Yoon says, citing Pearson plc (NYSE: PSO) as one of the more active strategic acquirers lately.
The London-based publisher of Penguin Books Ltd. made sure it retained the rights to the Penguin brand in education markets after it agreed to combine its book publishing business with Bertelsmann AG's Random House in a multi-billion merger on Oct. 29. The merged entity, to be called Penguin Random House, will be based in New York, with annual revenues of about $3.8 billion.
Pearson also spent $650 million to purchase EmbanetCompass, a provider of online learning services for nonprofit academic institutions, including program design and development, marketing, student recruitment and faculty training. The company, which is located in Chicago, Orlando and Toronto, was owned by private equity and venture capital firm Technology Crossover Ventures and global-education company Knowledge Universe.
Pearson also proved in 2012 that the trend is not exclusive to English-speaking countries. The company paid private equity firm Navis Capital Partners $16.3 million for PT Efficient English Services, which operates Wall Street Institute in Indonesia and provides English-language training to more than 8,000 students.
Navis Capital, based in Kuala Lumpur, Malaysia, established the service in 2007 through its funds Navis Asia Fund IV and Fund IV-S, with a $1.5 million investment. The deal was announced on the heels of Pearson's acquiring Author Solutions Inc., which provides an online education resource for writers, from Bertram Capital for $116 million on July 26.
Bertram first invested in Author Solutions of Bloomington, Ind. in 2007, and proceeded to grow it through a number of acquisitions. The firm bought iUniverse in October 2007, and went on to buy Xlibris and Trafford in 2009. The San Mateo, Calif. private equity firm said it grew the business more than four times during the course of ownership.
Pivotal Group made forays into the education space as well. On Oct. 23, Phoenix-based private equity firm placed a bid for Pan Am Education and won the company for an undisclosed price. Pan Am Education provides online learning services for students and education companies in 10 countries, including China, Brazil and Mexico.
With so many private equity firms aiming to do deals in the space, the education sector was bound to see its fair share of bidding wars.
Before McGraw grabbed the attention of so many sponsors, there was Plato Learning Inc.'s failed attempt to court Renaissance Learning Inc. with a $496 million bid. The company lost the auction for the school-software maker to European private equity firm Permira in late 2011. Overtures then began between Plato and Dallas-based Archipelago Learning Inc. the following May. Plato, backed by Thoma Bravo LLC, cut a deal with Archipelago in an all-cash transaction valued at roughly $291 million.
Meanwhile, strategic buyers have also been diligent in the space. Consider Echo360 Inc.'s acquisition of LectureTools Inc., a University of Michigan start-up company that makes interactive in-class educational tools that improve teacher-student engagement.
Echo360's tech and media background-it's backed by America Online co-founder Steve Case-exemplifies the trend of companies hoping to modernize classrooms so that interaction between students, professors and teachers are improved.
LectureTools, which provides digital polling, chat and assessment services, underscores the general direction the education sector is moving, says Fred Singer (pictured), chief executive of Echo360, who worked with Case at AOL during the Internet provider's heyday.
"Universities are not dinosaurs," Singer says. "They're here to stay, and if we can apply smart technology that's going to be a big change happening."
The fact that LectureTools' product can be accessed on laptops, tablets and cell phones, means the company meshes well with Echo360 which, in its own right, makes products that digitally record and share learning content, Singer adds.
The day prior to Echo360's deal, John Wiley & Sons Inc. (NYSE: JWA, JWB) agreed to spend $24 million on Efficient Learning Systems, an e-learning system provider that specializes in professional finance and accounting. The following week, John Wiley looked to get a return on its own education assets by selling Webster's New World Dictionary and CliffsNotes to Houghton Mifflin Harcourt's Trade & Reference division for an undisclosed price. Included in the deal was John Wiley's cookbook collection, which includes the Betty Crocker series, "Better Homes and Gardens" and "How to Cook Everything."
John Wiley didn't stop there. The publisher also picked up Deltak.edu LLC, a Chicago online-education company, for $220 million, on Oct. 2.
More deals are expected to pop up, Singer predicts.
"There will be more companies available over the next 24 months," he says, adding that right now the education sector is a relative growth market. "There's lots of competition and at some point it's got to consolidate."