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Estacio Targets Sao Paulo Schools in Bid to Double Profit

Estacio Participacoes SA (ESTC3), Brazil’s best-performing education stock in the past three months, plans to expand in Sao Paulo next year and maintain a strategy to buy small and medium institutions to double profit.

The company, which counts GP Investments Ltd. (GPIX) as its largest shareholder with a 19.5 percent stake, will open campuses and offer online classes in Brazil’s largest city to boost its student base by more than a quarter in three years, Chief Executive Officer Rogerio Melzi said. Estacio expects to double earnings before interest, taxes, depreciation and amortization, or Ebitda, to about 400 million reais ($196 million) in 2014 without any major acquisitions, he said.

“What we are doing in Sao Paulo is a transformation, similar to what we did in the rest of the country, but with a little delay,” Melzi said in an interview on July 11 at Bloomberg’s office in Sao Paulo. “There is no future for Estacio without a strong presence in Sao Paulo.”

Estacio, Brazil’s second-largest publicly traded university operator by revenue, is vying with rivals Kroton Educacional SA (KROT3) and Anhanguera Educacional Participacoes SA (AEDU3) to tap the market for higher education in Brazil, where less than one in 10 people has a college degree. Kroton, backed by private-equity firm Advent International Corp., is counting on a 1.3 billion-real acquisition to fuel growth, while Estacio aims to expand through acquisitions of institutions with less than 10,000 students and at schools it already operates.

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Estacio fell 0.4 percent to 24.60 reais at 12:43 p.m. in Sao Paulo Trading. The Bovespa index rose 0.5 percent.

“They are two different strategies and moments,” Jacqueline Lison, an analyst at Banco Fator Corretora, which rates Kroton a buy and Estacio a hold, said in an interview from Sao Paulo. “Estacio still has a lot of work to be done. We prefer to wait a bit to see the results.”

Rio de Janeiro-based Estacio gained 18 percent in the past three months in Sao Paulo trading before today, while Kroton and Anhanguera rose 14 percent and 4.5 percent, respectively. Its year-to-date gain of 37 percent compares with a 33 percent drop for the Bloomberg U.S. For-Profit Education Index of 13 companies and an average 6.9 percent total return for 198 companies listed worldwide that get at least 35 percent of their revenue from education.

Job Market

“Although Brazil’s economy seems to be slowing down, the job market still shows strength,” Thiago Capucci Macruz, an analyst at investment bank Itau BBA, said in a phone interview from Sao Paulo. “The students going to these universities are working adults.”

About 8 percent of Brazil’s population above 10 years old had a college degree in 2010, the latest year for which figures are available, according to national statistics agency IBGE.

Estacio, which acquired six companies in the past 12 months and aims to serve about 360,000 students by the end of 2015, will focus on small and medium acquisitions in the eight Brazilian states where it doesn’t already have businesses, Melzi said. States in the north and northeast, capitals and cities with more than 300,000 people are the main targets, he said.

Kroton announced in December 2011 that it agreed to acquire Uniao Norte do Parana de Ensino Ltda., known as Unopar, for 1.3 billion reais in cash and stock. Unopar is Brazil’s largest distance-learning educational institution, adding 162,000 students to Kroton’s register.

Estacio may make a bigger acquisition if an opportunity arises, Melzi said.

“Our plan A is to grow organically, using small and medium-sized acquisitions,” Melzi said. “But we never rule out larger deals.”

To contact the reporter on this story: Felipe Frisch in Sao Paulo at ffrisch1@bloomberg.net

To contact the editors responsible for this story: Jessica Brice at jbrice1@bloomberg.net; Helder Marinho at hmarinho@bloomberg.net

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