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.

We all know why Apollo Global Management went after University of Phoenix owner Apollo Education Group, and it's not because they bear the same name: It's because it's a bargain.

A group led by the buyout firm agreed  in February to pay $1.1 billion, or $9.50 a share, to take the struggling company private. The deal (accounting for Apollo Education's cash pile) values the for-profit education provider at 1.6 times its earnings before interest, taxes, depreciation and amortization, which makes it substantially cheaper than its rivals and worth the cost of betting on a turnaround. 

But with a looming shareholder vote on April 28, the deal could be blocked by the efforts of Apollo Education's two largest shareholders, Schroders and First Pacific Advisors, who believe the stock is worth a lot more. The duo own a combined stake of 23 percent, according to data compiled by Bloomberg, and could encourage other large shareholders to follow their lead.  (Apollo Education's shares closed Friday at $7.61 a share, roughly a 25 percent discount to the buyout offer, highlighting a healthy dose of skepticism about whether the deal proceeds). 

Bad Grades
Shares of Apollo Education are trading at a significant discount to its takeover price
Source: Bloomberg

First Pacific has previously said the company is worth roughly $29 a share, while Schroders said in February that it'd be voting against the offer in the absence of more information.  It's unclear if Schroders' stance has changed since Apollo Education's board outlined its rationale for recommending the deal in fillings. But the fact that Schroders has said it sees the potential for "multiple hundreds of percent of upside" for the stock in future years suggests it may not be convinced.

That wouldn't bode well for Apollo Global and its partners because the acquisition needs support from at least 50 percent of Apollo Education's Class A shareholders (Class B shareholders have already agreed to vote for the transaction). While proxy advisory firm Glass, Lewis & Co. last week recommended shareholders approve the deal, Institutional Shareholder Services said Monday they should oppose it because of the "extraordinarily low valuation being offered" and the potential for upside as a stand-alone company.

Here's a solution for the buyer group to consider before the April 28 vote in Phoenix: Sweeten the offer by adding a contingent value right, known as a CVR.  An inclusion wouldn't require Apollo Global and its partners to dig deep for an additional upfront payout. Rather, it would allow shareholders to receive a bonus payment (or payments) in the future if the company achieves predetermined financial milestones over various periods. Though the buyers' returns would stand to be dented if a turnaround goes as planned, it'd be better than no deal at all.

One Direction
Apollo Education recently withdrew its 2016 guidance, but not before acknowledging it was below previously provided outlook figures.
Source: Bloomberg

The CVR has been in the toolkit of other recent buyers and sellers. Television-station owner Nexstar included one as part of its deal for rival Media General and the practice is also common in pharmaceutical takeovers where companies are awaiting drug approvals.  

Apollo Global itself is no stranger to contingent payments. The firm's August 2015 agreement to take a majority stake in real estate manager AR Global involved cash, equity and "future performance-related contingent consideration." (The deal ended up getting scrapped in November.) 

To appease Apollo Education's shareholders, then, Apollo Global need look no further than its own playbook. 

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