Educate Hooks a Bargain

Sure are an awful lot of mergers and acquisitions going on over on Wall Street lately, eh? Oracle (Nasdaq: ORCL  ) up and bought PeopleSoft. Sprint's (NYSE: FON  ) acquiring Nextel (Nasdaq: NXTL  ) . Symantec's (Nasdaq: SYMC  ) buyingVeritas (Nasdaq: VRTS  ) . And no sooner had tutoring specialist Educate (Nasdaq: EEEE  ) taken its seat in (gone) public school, than it, too, raised its hand and asked permission to buy Hooked on Phonics.

So went the news on Friday. Educate is paying $13 million cash to buy out privately owned Gateway Learning Corp., along with its best-known brand: Hooked on Phonics (HOP). That's not a lot of money, either in absolute terms or as a multiple of HOP's reported $50 million in sales. In fact, Educate is paying just 0.26 times sales and acquiring a well-known brand name in return. When you consider that Educate's own stock is valued at a price-to-sales ratio of 1.9, this looks like quite a bargain transaction.

At this price, Educate can really afford to take only the best parts of Gateway Learning's business and toss the rest aside. Which is precisely what it proposes to do. You see, Hooked on Phonics today is a bit different from the franchise that we all knew, loved, and incorporated into the national pop culture back in the '80s and '90s. Back then, it was pretty much a pure infomercial play. The company advertised its products on TV. People called in and ordered sets of its books and tapes. The U.S. Postal Service did the rest.

Today, in addition to its telemarketing gig, Hooked on Phonics also licenses its products for use in molding young minds at 600 day-care-based "reading centers" -- primarily in cooperation with the nation's largest day-care provider, Kindercare. This new part of HOP's business model jibes quite nicely with Educate's own business of providing supplemental educational services. In acquiring Hooked on Phonics, the number of Educate's tutoring outlets will jump by more than 50% in the blink of an eye.

As for the infomercials, well, they're worth something at least. Just not so much that Educate wants to be bothered with them. The company doesn't yet plan to shut down the telemarketing unit. But for the time being, while it decides what to do with that part of the business, the plan is to "outsource" the infomercials to an as-yet-unidentified third party, which will sell Hooked on Phonics products by license.

Fool contributorRich Smithowns no interest in any of the companies mentioned in this article.


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