Race to Snap Up Brazilian Prep Schools Pits Kroton Against KKR

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For-profit college operator Kroton Educacional SA is considering jumping into the fray for Brazil’s lucrative private elementary and high schools. It will face stiff competition.

Kroton joins private equity firm KKR & Co. and a handful of billionaires betting that private-school enrollment for kids will stay strong even as the economy shrinks. For Kroton, it marks a new growth area after President Dilma Rousseff’s administration slashed funding for cheap university loans, sinking Kroton shares and putting an end to its three-year reign as Brazil’s top stock.

While student aid is being targeted as the government shores up fiscal accounts, investors say parents pinched by the slowing economy will give up eating out and trips abroad before putting their kids back in public schools. Rising private-school enrollment is a hard-won legacy of the decade-long economic expansion that added almost 45 million people to the middle class.

“Everything indicates that, yes, we’ll be interested in this business and we’ll want to be a relevant player in the sector,” Kroton Chief Executive Officer Rodrigo Galindo said June 30 in an interview at Bloomberg’s Sao Paulo office, adding that a final decision will be made next month. “The idea is to buy the best schools in a given city and use that brand to grow organically in other neighborhoods and in surrounding cities.”

Student Loans

Kroton last year became the world’s largest for-profit education company with the takeover of Anhanguera, its biggest rival. Belo Horizonte, Brazil-based Kroton tapped into a wave of first-generation college students fueled by the government student loan program known as Fies that used to offer rates of 3.4 percent. In the three years that Kroton topped the Ibovespa stock index, its shares surged sevenfold.

That all changed this year. Brazil’s Education Ministry surprised markets and triggered the stock plunge on 2014’s final day of trading when it published new rules limiting access to student loans and altering payment schedules. It has since tightened the restrictions even more, meaning that only about 37 percent of Kroton’s incoming students qualified for aid. About 56 percent of the existing study body uses Fies loans, Galindo said.

The Education Ministry didn’t respond to a phone call and an e-mail seeking comment.

‘Big Boost’

“Fies was the big boost for those companies and their stocks, but they shouldn’t have assumed it’d go on forever,” said Danilo de Julio, an analyst at brokerage Concordia Corretora who rates the stock the equivalent of hold. “While it’s positive the company is looking for additional business, it will be a long time before elementary and high schools account for a significant part of its revenue.”

In the meantime, Galindo said Kroton neutralized some of the impact this year by offering its own financing packages. The company is also offering more courses that meet student-aid guidelines and plans to sign a joint venture with a bank to further bolster funding options by year-end.

“We’re going to deliver the same number of students and the same results we expected in November 2014,” Galindo said.

While the shares have rebounded from a March 10 low of 9.30 reais, they were still down 23 percent this year through Wednesday. Kroton fell 0.8 percent to 11.85 reais on Thursday.

Consolidation Seen

Still, in this scenario, it makes sense to target lower-school education to diversify revenue and get ahead of an expected consolidation in the industry, said Paulo Presse, a research coordinator at consultant Hoper Educacao.

KKR’s Cognita Schools in 2014 bought part of a Rio de Janeiro school, two years after buying an institution in Sao Paulo, where the most expensive schools charge more than $25,000 a year. Billionaire Julio Bozano said in a December filing he would raise 800 million reais ($258 million) for an education fund. And Billionaire Jorge Paulo Lemann is the principal investor in Gera Capital Venture, an education-focused fund that last year was said to be seeking investments in elementary, middle or high schools, according to a person with knowledge of the matter.

KKR, Cognita, Gera and Bozano’s investment fund didn’t immediately return requests for comment.

“We’ve been seeing an interest for elementary and high schools now that didn’t exist some years ago,” Presse said.