A couple weeks ago, shares of Career Education Corporation (NASDAQ: CECO), a company that specializes in operating for-profit education programs, rose an astounding 57.37% in one day (I wish someone would have invited me to that party!). The reason behind the company's meteoric rise all boils down to one word; sale! You see, according to this source, the company agreed to sell off its European education operations to Apax Partners, a private equity firm, in exchange for $305 million in cash.
Terms of the deal
Prior to the announcement, the company's market capitalization was around $255 million which means that the company is receiving almost 120% of its market capitalization for selling off these assets. Obviously, this is a big deal for anyone involved and, as such, it comes with two big questions. What does this mean for shareholders and can you profit from it if you weren't already a shareholder?
To answer the first question, let's look at what Career Education Corporation already is. In short, as of the company's most recent annual report, it is a for-profit education company that operates more than 90 campuses between the United States, France, the United Kingdom, and Monaco. Throughout these 90+ campuses, the company serves around 76,000 students who are studying for anything from a certificate to a doctoral degree.
In 2012 alone, the company's ongoing operations were responsible for bringing in $1.49 billion in revenue, down 20.5% from 2011 when the company raked in an impressive $1.87 billion. Due to a change in the regulatory structure as well as fewer student enrollments, the company (as well as many of its peers) has seen its student count decrease significantly. As an example of this, the company boasted 98,800 students as of the end of its 2011 fiscal year, a number that shrank to 76,000 by the end of 2012.
What does this deal mean?
One thing is for sure when looking at the terms of the deal and that's that Apax Partners picked one of the best parts of Career Education to buy. Along with the fact that 15% of the company's student count comes from its international segment while 8.6% of its revenue comes from this segment, there are some major positive attributes to what Apax Partners will receive in exchange for the deal.
The first is that, unlike a vast majority of the company's segments, the international segment that Apax Partners is buying actually earns positive operating income. For 2012, the combined entity's operating loss totaled $183.75 million, whereas its international operations made a relatively impressive $21.13 million profit. Likewise, while the company's total student count declined by 23.1% from 2011 to 2012, the international segment actually increased its student count by a modest 3% which made this the only segment to add to its student body.
So, for $305 million, Career Education is giving up one of the best (and the only growing) part of its business. However, since the amount of cash it will receive is so large relative to its market capitalization, this should give the company more firepower to compete with larger peers like Apollo Group (NASDAQ: APOL) with its $3.14 billion market capitalization or ITT Educational Services (NYSE: ESI) with its $961.4 million market capitalization.
Both of these companies are significantly larger than Career Education, which means that it has a lot of ground to make up if it wants to take a leading role in for-profit education. However, this cash infusion could be just the start of better things for the company as it can leverage this cash to either improve its existing operations or expand into areas that may prove more profitable. Aside from these two possibilities, there is also one more important interpretation that can be taken away from all of this; there might actually be some value throughout the entire industry up for grabs.
You see, while it is virtually impossible to draw a strong correlation between one of Career Education's segments and the others, this transaction does imply that some market participants value at least some parts of its business at far more than Mr. Market does. As such, it is possible that other participants could value the international operations of some of Career Education's peers in a similar manner.
Assuming the same premium to revenue, this would imply that Apollo Group would see its international segment, Apollo Global, have a potential value of $656.4 million compared to the $275.8 million it brought in as revenue for 2012 (an increase of 2.3% but at an operating loss of roughly $60 million). In juxtaposition, ITT doesn't have an international segment but it is still possible that a market participant could come into the equation that values part of the enterprise significantly.
As we have seen, it is clear that there is something interesting at work in regards to for-profit education; some opportunity that Mr. Market is either overlooking or an error on the behalf of Apax. In the case of the former, this could spell opportunity for any investors with the foresight to see where the value is, exactly. However, in the case of the latter, this could grant investors overly generous expectations.
While it is nice to fawn over buying shares of a potentially lucrative takeover opportunity, it is far wiser to invest in whichever of these companies is fundamentally strongest. By doing this, the Foolish investor will likely limit their downside while opening up the possibility of a profitable takeover in the future should any more take place.
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