Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

When a private-equity firm runs the ruler over a target that coincidentally bears the same name, code names come in handy.

That's bound to be the case at Apollo Global Management's headquarters: The Wall Street Journal reported late Monday that it's the last of a number of private-equity firms still in talks to buy Apollo Education Group, a beleaguered for-profit education provider.

Getting Schooled
Most U.S. for-profit education providers have had a tough time of late.

Though Apollo Education's stock spiked in early trading Tuesday, shareholders weren't cheering Monday when the company acknowledged that it was exploring strategic alternatives. In fact, the stock closed at its lowest level since 1996. 

Apollo Global, which has a reputation for being one of the shrewdest investors on Wall Street, isn't one to shy from a falling knife. That's something Apollo Education, owner of the University of Phoenix, appears to be. The company is the worst-performing of its peers, due in part to an investigation by U.S. regulators into unfair advertising, marketing and recruiting practices.  In October, the U.S. Department of Defense put the school on probationary status and said it was considering terminating a partnership, meaning the school's active-duty military students would no longer be eligible for financial aid. Apollo Education said at the time that the Defense Department's Tuition Assistance Program represented less than 1 percent of the school's net revenue. 

One-Way Ride
Apollo Education's earnings have been declining dramatically.
Source: Bloomberg

The company is also experiencing a sharp decline in student sign-ups: in the quarter ended Nov. 30, enrollment of new students pursuing degrees fell 38 percent to 24,500 while the overall average fell 20 percent to 183,800. With net revenue of $2,561 per enrollment, the latter drop presents a $120 million hole for Apollo Education. 

Apollo Education's global arm, aptly named Apollo Global, is a bright spot. The unit -- which serves students around the world including the U.K., Europe, Australia and South Africa -- is on target for a record year, according to the company. Though it's responsible for just 20 percent of the company's overall revenue, that's likely to grow over time.

If a deal is consummated at or around the Wall Street Journal's reported price tag of $1 billion, Apollo Global stands to pay a premium of around 40 percent to Monday's close. Though that seems rich, and slightly above what analysts on average believe the company could fetch in a sale, a deal at that price would represent a multiple of just 1.3 times Apollo Education's earnings before interest, taxes, depreciation and amortization. That's a steal, considering the global industry average is 6.2 times and the company boasts almost $800 million of cash and equivalents on its balance sheet. 

Education Comes Cheap
U.S. for-profit education companies are inexpensive compared to global peers.
Source: Bloomberg

Such a deal could face opposition from shareholders such as Larry Robbin's Glenview Capital Management, who bought the stock when it was trading closer to $30. But if sealed, it will help Apollo Global maintain a lid on the average Ebitda multiple it pays for its targets, which has hovered "slightly below a six," according to chairman and chief executive Leon Black, who recently described part of the firm's "secret sauce" as buying low.  

Apollo Education wouldn't be Apollo Global's biggest education bet. That title still belongs to McGraw-Hill Education, a publishing company that is set for a U.S. IPO. Unfortunately for Mr. Black and his comrades, Apollo Education isn't even big enough to make a meaningful dent in the firm's $18.5 billion pile of dry powder available specifically for private-equity investments.

Too bad there aren't more unaffiliated Apollo-named entities that make for ripe targets. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net