Kroton Eyes Estacio for $968 Million Brazil Education Merger

  • Deal doesn’t provide premium over Wednesday’s market close
  • Estacio shares surge the most since 2008; Kroton also climbs

Kroton Educacional SA, Brazil’s biggest for-profit education company, is studying a bid to acquire its largest rival, Estacio Participacoes SA, for 3.48 billion reais ($968 million) in stock.

Estacio surged the most in more than seven years in Sao Paulo trading, climbing 22 percent to as high as 13.55 reais. It was up 20 percent to 13.29 reais at 12:33 p.m. Kroton gained as much as 14 percent to 12.80 reais, the most since February 2015.

Investors would get 0.977 share of Kroton for each share they hold in Estacio, according to a filing. Kroton’s proposal wouldn’t represent a premium for Estacio, which was valued at 3.5 billion reais at the close of trading Wednesday. Kroton has a market value of 18.2 billion reais and had 574 million reais in cash and equivalents at the end of March, according to data compiled by Bloomberg.

Kroton hired Itau BBA and Barbosa Mussnich Aragao as advisers on the bid and said it isn’t in talks with Estacio.

Estacio told Brazilian regulators it became aware of Kroton’s interest only Thursday through Kroton’s filing. Estacio also said the companies aren’t currently talking and it will keep shareholders and the market informed of any developments.

Buying Spree

Such a combination would add Estacio’s 600,000 students to Kroton’s base of 1 million. Kroton has been on an acquisition spree over the past six years, spending 10.8 billion reais in a deeply fragmented market. Brazil has four other major private higher-education players: Gaec Educacao SA and Ser Educacional SA, which trade on the Sao Paulo stock exchange, and DeVry Education Group Inc. and Laureate Education Inc., which are based in the U.S. Additionally, there are 2,300 small universities spread around the country.

Kroton may face antitrust issues if it decides to move forward with an offer because of the size of the two college operators, said Vitor Suzaki, an analyst at brokerage Lerosa Investimentos in Sao Paulo.

‘Already Dominant’

“The first big obstacle will be Cade,” Suzaki said, referring to Brazil’s antitrust regulator. “Kroton is already dominant in several states. A combination of the two companies would create an even bigger giant.”

Education stocks in Brazil have been dragged down as government cutbacks threaten a key source of financing for students. Kroton is working on a joint venture with a bank to provide financing for higher-ed student loans and is working with competitors on a proposal to shift some financing of state-sponsored loan programs such as Fies and Pronatec to private entities, Chief Executive Officer Rodrigo Galindo said in an interview last week.

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