Oct. 21, 2015 5:23 PM ET
Laureate Education has filed for an IPO with a $100 million placeholder.
They join the recent string of heavily leveraged private equity owned IPOs.
In an industry that has been beaten and bruised with no clear end in sight, how will Laureate Education’s IPO hold up?
Founded in 1999, Laureate Education (Pending:LAUR) is a for-profit higher education company operating in 28 countries with more than a million students. They are the largest degree-granting higher education institution with more than 200 physical campuses. With an impressive 93% of their students attending these campus-based institutions, Laureate Education draws more similarities to traditional higher education than their counterparts. The school’s programs also draw similarities to leading universities:
Source: Laureate Education S-1
Laureate Education has seen tremendous growth, however they are anticipating more future growth in emerging markets. Some of this they are hoping to achieve by way of increasing their online education programs attendance, which has become significantly more competitive as public and private colleges and universities have entered into this strategy in recent years. With ambition to continue international growth they face economic, cultural, and regulatory challenges. Laureate Education competes with other for-profit higher education institutions, such as Apollo Education Group (NASDAQ:APOL), Capella Education (NASDAQ:CPLA), DeVry Education Group (NYSE:DV), and Strayer Education (NASDAQ:STRA), as well as standard non-profit colleges and universities.
Here are 4 things to consider when evaluating this IPO:
2015 has been a horrific year for for-profit education companies. As you can see from the chart below, for-profit education companies have been falling at an alarming rate for 2015. With so many people getting burned, Laureate Education has a wounded investor base they need to motivate. The industry has faced a negative 3 year growth rate in revenue and net income. With enrollment falling people are concerned about how much more the market will decrease in the future.
Their story is like every other disappointing IPO – PE owned with huge debt.The company was taken private in 2007 by KKR (NYSE:KKR) and Citigroup Private Equity for $3.8 billion. During that time they experienced massive growth acquiring about 50 institutions. But of course, debt also grew from $1.1 billion to $4.7 billion. The interest expense from this massive burden of debt is preventing the company from producing any positive net income. Even with a favorable IPO there will still likely be a substantial amount of debt remaining on their books.
They’re a public-benefit company. It may not sound like a big deal, but they need to be on the good side of the government. They have an added responsibility to protect their stakeholders. The federal government has already starting cracking down on for-profit colleges. Their marketing tactics of over-promising better wages and opportunities have come under scrutiny. With the Department of Education claiming that 90% of for-profit colleges’ revenues come from the federal government, Laureate Education’s ability to manage both shareholder and stakeholder value is of the utmost importance.
They’ll try to fetch a $5 billion valuation. Although the company is not making money right now, their revenue growth is huge, especially comparing it to the education and training services industry which has a negative 3 year revenue growth average. At a $5 billion valuation they’ll trade at a price/sales of 1.1 and price/book of 0.9 – both below the industry averages.
For-profit education is not currently stable and I cannot tell you when it will stabilize. The idea of for-profit education is not new, however it has evolved into something that perhaps it shouldn’t have. Most for-profits were niche and didn’t award typical college degrees, however in more recent times they have evolved into what are thought of as more standard colleges. This evolution saw growth and success, but now it may be seeing its demise. The easy and convenient “online schooling” is no longer anything unique as better non-profit colleges have replicated the idea with success. Competition, regulation, and poor industry outlook is enough to make me walk away from the Laureate Education IPO.