Estacio Weighs M&A to Diversify Beyond College Classes

Estacio Participacoes SA, the education provider buying university company Uniseb, is seeking acquisitions to diversify beyond college-course offerings and cut dependence on government-backed student loans.

Chief Executive Officer Rogerio Melzi said he’s targeting providers of corporate training and continuing education, an industry that’s also luring interest from private-equity funds including KKR & Co. and Carlyle Group LP. Those classes don’t get the federal subsidies that have propped up for-profit college companies since 2010.

“The fact that we operate in a government-regulated sector, you never know what may happen, especially in a country like Brazil, where authorities interfere with the day-to-day at companies more than we’d like,” Melzi said in an interview in Rio de Janeiro. “Policies change. There is a hand that operates above you and can change the rules quickly.”

After easing loan terms in an effort to encourage students to attend college, the government is considering health-care and education spending cuts this year as public finances deteriorate, according to two government officials who asked not to be identified because the talks aren’t public. President Dilma Rousseff will snip 44 billion reais ($18.7 billion) from the 2014 budget as higher debt puts Brazil at risk of a credit rating downgrade ahead of presidential elections in October.

Estacio, based in Rio de Janeiro, rose 32 percent to 21.70 reais during the last 12 months, compared with a 71 percent gain at Kroton Educacional SA and a 6.7 percent drop for Anhanguera Educacional Participacoes SA.

KKR, Carlyle

KKR, the buyout firm founded by George R. Roberts and Henry R. Kravis, Carlyle Group and Apax Partners LLP are trying to buy a controlling stake in Abril Educacao SA, which operates college test preparatory courses and language schools, according to two people familiar with the matter who asked not to be named because the negotiations are private.

KKR owns a stake in closely held Laureate Education Inc., one of the largest for-profit higher education companies in the world, which paid 1 billion reais for Brazilian university chain FMU last year.

As part of its expansion into new businesses, Estacio announced a 30 million-real partnership last month with Grupo Contax to train its 4,000 employees in marketing and management. It is also looking at investing in postgraduate courses and preparatory classes for public-sector jobs.

“These are all initiatives keeping in mind the mid- and long-term for the company,” Melzi said in an interview on Feb. 21. “None of these projects do I expect will provide returns in 2014 or 2015. Maybe starting in 2016.”

Student Loans

Estacio is trading at 25 times estimated 2014 earnings, the same as Kroton and compared with 29 times for Anhanguera, according to data compiled by Bloomberg. Return on equity was 19 percent in the third quarter of 2013 for Estacio, compared with 18 percent for Kroton and 6 percent for Anhanguera.

About 28 percent of Estacio’s on-campus students used government-backed student loans, known as Fies, in the third quarter of 2013, compared with 52 percent for Kroton and 36 percent for Anhanguera, according to regulatory filings. Kroton and Anhanguera declined to comment.

“Estacio would have had brilliant results even without Fies,” Melzi said. “We have never accepted being dependent on Fies. It’s a program for students, not for universities.”

Brazil’s antitrust authority said today it has objections to Estacio’s proposed acquisition of Uniseb after finding that together the companies would dominate the market in nine cities. The deal will now be considered by the regulator’s court.

Unattractive Aspects

The Fies loans have some unattractive aspects for companies, including a 90-to-100 day lag in receiving payment, compared with immediate funds from students who pay full tuition, Melzi said. Students who don’t necessarily need aid are also using the Fies program, leaving less for needy students and increasing losses, Melzi said. There is also the political risk to consider, he said.

A spokeswoman from the Ministry of Education referred questions regarding the Fies program to the national education development fund, which did not respond to an e-mail request for comment.

The government has been borrowing funds at the benchmark interest rate of 10.5 percent -- the central bank’s board voted yesterday to raise that figure to 10.75 percent -- and losing money because its student loans have a rate of 3.4 percent under Fies, said Vitor Sousa, an analyst at Corporativo GBM SAB, in a telephone interview from Sao Paulo.

“We’re in an election year, so nothing will happen before the election, but what about 2015?” said Sousa, who has the equivalent of a hold recommendation on Estacio.

Government Partner

The government is still “a partner for education companies,” said Guilherme Moura Brasil, an analyst at Fator Corretora SA, in a telephone interview from Sao Paulo. “Fies is important for all of the companies.”

Brazil is also expanding student financing for technical schools, in which Estacio is investing too, said Juliana Heimbeck, an analyst at Fator Corretora, in a telephone interview from Sao Paulo. Heimbeck and Brasil have a buy recommendation for Estacio.

“We think there is a risk of the government reducing loans, but it’s not very likely,” Heimbeck said. “The government will continue strongly with Fies and now with a focus on the technical school loans.”

Either way, Estacio isn’t taking chances on the government.

It’s always been a conservative company with the lowest penetration of student loans, said Bruno Giardino, a Banco Santander SA analyst in Sao Paulo, by telephone, who has a buy recommendation for Estacio.

“Those who show more growth in Fies may be more favored, but that doesn’t mean Estacio isn’t growing,” Giardino said.

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