U.S. Battle With For-Profit Colleges Flares Over Sale of Giant School
The U.S. Department of Education slapped a set of tough conditions on a $1.1 billion private equity bid for the company that owns the University of Phoenix, the nation’s largest school, after years of trying to rein in the for-profit college industry.
The university's owner, Apollo Education Group, won preliminary government approval Wednesday for a group of Wall Street investors including Apollo Global Management LLC (no relation) to buy it. But the conditions of the approval, which the prospective owners must meet for the school to continue receiving federal student aid, are so exacting that they have a legal right to walk away from the agreement, deal documents show. For example, they must stump up a $385.6 million letter of credit and, in a serious obstacle to profitability, are barred from expanding the school's enrollment.
"It feels like a punishment, and I can't really understand the basis for what the punishment is," other than that the Obama administration had "an opportunity" to crack down, said Trace Urdan, an analyst at Credit Suisse Group AG who follows the higher-education sector.
Michael Frola, an Education Department official, said in a letter to the university's president that declining enrollment, government investigations, and the prospective buyers' lack of experience running a college heighten the risk that the school would abruptly shut down and leave taxpayers holding the bag. Department spokeswoman Kelly Leon declined to offer additional comment.
Proprietary schools have been the object of widespread complaints by consumer advocacy organizations and state attorneys general that they engage in misleading marketing practices to enroll students, only to saddle them with taxpayer-backed debt they're unable to repay. Urdan sees the tough conditions placed on the deal as a sort of "parting shot" by the outgoing administration.
The University of Phoenix has been mired in controversy for years. The Federal Trade Commission, California's attorney general, and the Education Department's inspector general are among the authorities investigating the school, according to Apollo Education's most recent annual report.
No school disbursed more federal student loans last year than the university, federal data show. Its students collectively received more than $2.4 billion over the past two academic years, about 64 percent more than the second-largest recipient, for-profit Walden University. Former students have the most federal debt outstanding of any U.S. college, according to a 2014 study co-authored by Adam Looney, deputy assistant secretary for tax analysis at the U.S. Treasury Department.
Like many for-profit colleges, the University of Phoenix has been buffeted by enrollment declines and higher costs after years of scrutiny by government authorities and a rebounding U.S. economy, which has sapped demand for career-training programs. Annual revenue at Apollo Education has fallen by half since 2012, to $2.1 billion, according to its most recent annual report, and its $91 million loss is a far cry from the $417 million profit it posted just four years earlier.
At the same time, Urdan said, despite allegations of impropriety that prompted the government investigations, none have been proved, and the company is on a solid financial footing. Career Education Colleges and Universities, the for-profit higher-education industry's main lobbying group in Washington, has claimed for years that the Obama administration has unfairly targeted the sector on ideological grounds.
In February, Apollo Global Management partnered with investors, including former Obama administration officials, to purchase the 40-year-old University of Phoenix and Apollo Education's other schools, which are mostly overseas. Among the investors is Tony Miller, chief operating officer of Vistria Group and a former deputy education secretary, and Martin Nesbitt, a longtime friend of President Barack Obama. They set out to buy publicly traded Apollo Education and take it private in a transaction that valued the company at $1.14 billion.
When they announced the agreement, Greg Cappelli, Apollo Education's chief executive, said the deal with Apollo Global would give the company "the flexibility and runway it needs to complete the transformational plan" at its flagship school. Those plans could now be in jeopardy if the deal doesn't go through and shareholders demand increased income of the school, at a time when the for-profit sector is reeling.
The deal is subject to numerous conditions, one of which allows the buyer to abandon its bid if the Education Department requires the company to post collateral in excess of 10 percent of its federal student aid haul the previous year. Such a demand would be a “burdensome condition” that could scuttle the transaction, Apollo Education told investors in March.
On Wednesday, the department required 25 percent. Based on Apollo Education's receipts of federal student loans and grants during its most recent fiscal year, that translates to a collateral demand of nearly $386 million.
Apollo Education declined to comment beyond acknowledging that it had received the Obama administration's verdict.
If Apollo Global and its fellow buyers "can't squeeze out the profits they need to make the investment worthwhile," they may end up walking away from the transaction, said Rohit Chopra, formerly the nation's top student loan official at the federal Consumer Financial Protection Bureau. "If investors were betting that the Education Department would rubber-stamp this deal, they bet wrong," said Chopra, who later advised Education Secretary John B. King Jr.
The government's other conditions on Apollo Education's sale to the consortium of private equity buyers include restrictions on potential changes to its career-training programs, limits on its recruitment practices, and regular reporting of its projected cash flow and roster of students. The requirements are unlike anything Urdan has seen, he said. For example, such stipulations usually end by a certain date. In Apollo's case, he said, they seem to "go on forever."
"These are all pretty severe conditions," Urdan said.
The Education Department said the conditions would likely end by June 2018, giving the prospective new owners about 18 months to address authorities' concerns.
There is a potential bright spot for Apollo Education and its buyers, he said. In fewer than 45 days, Donald Trump will be sworn in as U.S. president. Republicans, who largely support for-profit colleges, will control Congress, too. At that point, Urdan said, "maybe Apollo can get some accommodation" from the feds.
(Updates with additional information on the Education Department's restrictions in the second paragraph from the bottom.)