Kroton Surges on $2.49 Billion Acquisition: Sao Paulo Mover

Kroton Educacional SA rallied to a record after agreeing to buy Anhanguera Educacional SA for 5 billion reais ($2.47 billion) in an all-stock deal that will create the world’s biggest for-profit education company.

Kroton rose 8.4 percent to 27.25 reais at the close of trading in Sao Paulo, the highest level on record, after it said in a regulatory filing today that it will pay 1.36 shares for each Anhanguera stock. That values Anhanguera shares at 34.38 reais apiece, based on Friday’s closing price before adjusting for a scheduled dividend payment. Anhanguera also rallied, gaining 7.8 percent to 36.80 reais.

The deal will form the world’s largest for-profit education company by market value with more than 1 million students, overtaking Japan’s Benesse Holdings Inc., according to data compiled by Bloomberg. This is the fourth school acquisition by Kroton since the 1.3 billion-real purchase of Uniao Norte do Parana de Ensino Ltda, Brazil’s largest distance-learning institution, was announced in December 2011.

“This represents the creation of a unique company with a strong presence in higher learning -- long distance and on campus,” Kroton Chief Executive Officer Rodrigo Calvo Galindo said in a conference call today.


The combined school will operate in all Brazilian states and has room to reduce costs, Planner Corretora in Sao Paulo said today in a report to clients.

“Both companies have a lot of upside in margins operating alone, and both companies operating together the upside is even greater,” Anhanguera CEO Ricardo Scavazza said on another conference call today. Galindo and Scavazza declined to provide estimates for potential cost reductions or revenue gains on the call.

Kroton is the biggest distance learning institution in Brazil and Anhanguera has a greater number of on-campus students.

“The companies complement each other in operations,” said Sandra Peres, an analyst in Sao Paulo at Coinvalores. “It has very good perspectives.”

The companies will have the opportunity to significantly increase the use of student loans provided through a government program known as Fies, available only to on-campus students.

“This is a huge opportunity,” Peres said. “It decreases dropout and default rates.”

The companies will operate separately until the antitrust regulator, known as Cade, approves the acquisition. Cade, based in Brasilia, has 330 days to issue a decision.

Anhanguera and Kroton operate in 80 cities and overlap in four, Galindo said in a press conference in Sao Paulo.

“This gives us complete confidence that this will be approved,” he said.

Done With Acquisitions

Kroton and Anhanguera will not seek new acquisitions for several years while the new company is being created, the company executives said.

That leaves room for competitor Estacio Participacoes SA., which fell 0.3 percent to 43.70 reais today, to grow, said Matheus Mufarej, an analyst at Sao Paulo-based Victoire Brasil Investimentos, which owns 96,000 shares of Anhanguera and 31,000 of Estacio.

“I believe in the mid-term that this will be a positive, since with Anhanguera and Kroton occupied in digesting this merger, other attractive assets will be available and the company is capitalized exactly for that,” he said in an e-mail response to questions.

Justifiable Rally?

Galindo will be the CEO of the combined company, and Scavazza will join the board, the companies said. Kroton, based in Belo Horizonte, will have 57.48 percent of the new company while Valinhos-based Anhanguera will own 42.52 percent. Kroton will issue 198.8 million new shares as part of the deal.

Kroton gained 9 percent in Sao Paulo so far this year before today, compared with Anhanguera’s 1.2 percent decline and Estacio Participacoes SA’s 5.1 percent gain. The Bovespa Small Caps index fell 5.9 percent in the period.

“The big challenge is to measure the potential operational synergies and try to understand to what point the positive market reaction is justifiable, or not,” Mufarej said.

Fator Corretora in Sao Paulo increased its rating for Anhanguera to buy from hold after the deal and reiterated its buy rating for Kroton.

“I don’t see this in any way but positive for both companies,” Renato Prado, an analyst, said in a telephone interview.

(Updates with closing prices in second paragraph.)
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