Laureate Education (LAUR) – Liquidation + Expected Tender – 50% Upside

Current Price: $14.62

Target Price: $21.94

Upside: 50%

Expiration date: TBD

This idea was shared by WhtKngt.

 

Private higher education company Laureate Education is in the process of disposing of all of its operating businesses. The strategic review was launched in Jan’20 and since then, the company has already sold almost half of its operations and paid down a large part of the debt (currently in net cash position). Management is committed to unlocking the value of the remaining assets – operations in Peru and Mexico as well as closing the currently pending sale of Walden University ($1.48bn). Walden sale is expected to be completed in Q3’21 after which LAUR will be standing on $1.5bn+ of net cash. As indicated by management numerous times already, a large tender offer/buybacks are expected after the sale closes. It will be hard to return such amounts of capital through open market purchases and therefore I believe we will see a tender announced shortly.

From the 1Q21 Call:

We continued to believe that returning capital to shareholders through stock buyback is very accretive use of capital for our investors, given the significant discount of our stock price versus the intrinsic value of the individual institutions in our portfolio.

4Q20 Call:

Our intent is to return large amounts of excess cash to our shareholders in a tax efficient manner during 2021, following the completion of the pending divestitures.

3Q20 Call:

The most tax efficient manner to return capital to shareholder is in the form of open market purchases, so share buyback like the program we’ve just announced as well as other means such as a tender offer. So at this point in time, we are not thinking of distributing cash or excess cash to shareholders in the form of dividends, obviously that may change, but our priority is really to do it in the most tax efficient manner.

At the current LAUR share price, the remaining Peru (the crown jewel of LAUR) and Mexico operations are dirt cheap – trading at a mere 3.6x TTM EBITDA, whereas management previously said that it expects to sell these assets for similar multiple as the recently sold Brazilian assets (10x TTM EBITDA). Applying 10x multiple on $215m in TTM EBITDA for the Peru business and a more conservative 6x on the $110m in TTM EBITDA for Mexican business, I arrive at operating business value of $2.8bn, which together with a $1.5bn net cash translates into equity valuation of $4.3bn ($21.94/share) – 50% upside the current market cap of $2.86bn ($14.6/share).

I don’t think it would be out of the realm of possibility to see someone make an offer for Peru & Mexico as from the proxy related to the recent Brazil operations sale there was a party (“Party C”) interested in buying ALL the Latam Assets for $3.5bn, further bolstering the conservativeness of my valuation for the remaining businesses.

Management is currently waiting for the Peru and Mexican operations to normalize post-COVID, however, are open for the inbound interest (Q4’20 Call):

That said, the decision to focus on a regional operating model in Mexico and Peru does not preclude further engagement with potential buyers for these businesses as we are committed to pursue the best strategy to optimize shareholder value.

The margin of safety is significant – even if the Peru & Mexico business are not sold immediately, they are trading at a very low implied valuation. Corporate overhead stands at c. $20m/year (correction: annual overhead is c. $90m on adjusted EBITDA TTM basis – expected to decline going forward) and makes only a limited impact to the overall valuation of the company.

The situation exists because LAUR stock has been forgotten and lost sell-side coverage due to the strategic review. The company has been shunned by investors because of the DoJ investigation which has since been dropped. In Jan 2020, the stock had 7 buys, 1 hold, 0 sells with an average price target of $21/share. Currently, only Stifel covers Laureate and has a buy with a $17/share target price.

Directors own just 3.3%, however, the company is effectively controlled by its major shareholder Wengen Alberta (35% of economic value and 80.3% of the voting power). Wengen is a limited partnership formed in 2007 by a number of large investors including KKR to acquire Laureate. In 2017, Wengen took LAUR public in an IPO at $14/share raising $456.5m. Wengen has 3 directors on LAUR board. The information on the partnership is limited, however, according to the recent proxy (April’21), KKR had 28% interest in Wengen (increased from 19% in 2017), CPV Holdings – 19%, Sterling Capital (PE with $81bn AUM), MMF MLP – 3%, Snow Phipps (PE with $2.4bn AUM) – 4%. Apparently, all these big players have been holding LAUR since 2007 and might be interested in cashing out.

Aside from that, KKR has also invested in LAUR independently. In 2016, together with Snow Phipps, it injected $400m in LAUR in return for Series A pref stock. KKR converted the pref. shares and in 2018 owned 5% of LAUR. Interestingly, earlier this year Wengen made two distributions (March and July’21) to its investors, which increased KKR ownership in LAUR to 13.7%. CEO of Snow Phipps also owns 2m LAUR shares personally (1% outstanding shares and also is a director of LAUR).

Given the close involvement of top-tier investors (who have invested in LAUR since 2007), I expect further asset sale and shareholder value unlocking processes to go at maximum efficiency.

 

Additional background and details

Laureate Education is a private Higher Learning Company. They operate a portfolio of degree-granting institutions. Laureate’s Universities are leading brands in their respective markets and offer a broad range of undergraduate and graduate degrees through campus-based, online and hybrid programs. They currently have over 300k students enrolled at 5 institutions with over 50 campuses. More than 75% of students are enrolled in programs of 4+ years.

Coming into 2020, Laureate had assets across the globe. In Jan 2020, LAUR announced that it would explore strategic alternatives for each of its businesses in order to unlock shareholder value. The stock jumped from about $18 to $21+ or from about 7x EV/EBITDA to 8x EV/EBITDA (traded 6.5x – 9x from 2017- early ’20). At the time, this EV included about $1.85bn in net debt or about 6x on the $308mm in EBITDA from 2020.

Since announcing the strategic review, Laureate has already sold their Australia & NZ operations for $653m (Nov’20); Honduras ops for $60m (Mar’21); Chilean ops for $218m (Sep’20); Malaysian ops for $140m (Sep’20); Costa Rican ops for $15m; Brazilian ops for ~ $650m (just closed late May’21 at a higher than expected price due to FX hedging). Currently, LAUR is also in contract to sell US-based Walden University to Adtalem (ATGE) for $1.48B.

Initially, the sale of Walden was conditioned upon approval from The Higher Learning Commission (HLC), the Dept of Education (DOE), and the Council for Accreditation of Counseling and Related Educational Programs (CACREP). Department of Justice (DoJ) investigation was announced last year and the deal review was designated as “under governmental investigation” at the HLC. However, in early April the DoJ concluded their investigation and decided to decline intervention. HLC and DOE approvals were also received on the 13th of July’21. A consent from CACREP should also be received shortly. The transaction will close within 5 days of fulfilling all conditions.

Aside from the Walden sale, LAUR has remaining operations in Peru and Mexico. Peru operations had been seen as a Crown Jewel of the portfolio. The asset grew organically at mid-single digits with  EBITDA margins in the high 30’s. Mexico was less exciting but still low-single digits growth with a low 20’s margin. Since COVID hit, most on-campus learning was shifted to remote and new enrollments were down a bit. Due to this, the company has paused the Strategic Review/Wind Down of assets. In the past, management communicated that they would sell these assets around the same multiple as the Brazilian business which was done at ~ 10x TTM EBITDA.  The belief is they would like to normalize EBITDA here first but would be open to inbound interest.

Currently, there is about $400m of net cash on the balance sheet and the company has $250m authorized for share purchases.

40 COMMENTS

  1. Benoak

    Thanks for the write-up. Can you share your thoughts on the current situation in LATAM due to covid and the shift of many students to take classes at zoom instead of fiscal location? I wonder if they are going to burn cash going forward? Making sure I’m not missing anything 😉

  2. alope068

    I believe in Ecuador kids are already back to school as of 2-3 weeks ago. Perhaps Peru is or will do the same.

  3. VB200

    Have you seen any sign of interest for the latam assets since “Party C” submitted its $3.3-3.6bn indication of interest on February 3, 2020?

    2
  4. AG

    Thanks for the writeup. You mention the company has $400M of net cash. But as of March, the Q1 balance sheet shows a net debt position even if you exclude operating leases ($951M of debt, $50M of finance leases, $476M of operating leases, $561M in cash and $107M in restricted cash). Have there been any disposals since March that have have resulted in a net cash position? Also, does the net cash balance of $400M include the restricted cash and is it net of operating liabilities?

    “Applying 10x multiple on $215m in TTM EBITDA for the Peru business and a more conservative 6x on the $110m in TTM EBITDA for Mexican business, I arrive at operating business value of $2.8bn”. In addition to the positive Ebitda from Peru and Mexico the company also reports some $90M of negative LTM Ebitda for the Corporate segment, which is larger than the $20M of corporate overhead that you mention in the article. Shouldn’t that also be a drag on the valuation?

    2
    1. dt

      Sale of Brazilian operations closed in May – that adds $650m to net cash balance.

      Re corporate overhead, you are correct it should have been $90m annually. However, these expenses are gradually declining – for Q1’21 only $19m vs $26m last year. With the sale of Brazilian operations as well as Walden University, overheads will continue to trend materially lower.

      Also in case of sale of the remaining (Peru/Mexico) operations within the next year, the level of overheads becomes irrelevant.

      1
    2. Ilja

      So in Q1’21 LAUR had – $951m debt (operating leases are not included) and $561m cash for a total net debt of $390m.

      The Brazil sale agreement was for a total consideration of R$4.4bn (US$765m at the time, out of which US$650m had to be paid in cash and the remaining in stock). Since early Nov’20 to late May’21 USD depreciated by roughly 10% vs BRL, so all in all, the company received around US$715m cash from the Brazil sale + US$115m in stock. Additionally, LAUR is entitled to receive additional R$200m (~$40m) in cash if it meets some kind of conditions post-closing. Anyways, assuming that all or part of the received stock was promptly converted into cash, the $400m net cash figure is approximately correct.

      Sale agreement – https://www.globenewswire.com/en/news-release/2020/11/02/2118398/0/en/Laureate-Education-Enters-into-Definitive-Agreement-with-%C3%82nima-Holding-S-A-for-Sale-of-its-Brazilian-Operations-for-Approximately-R-4-6-Billion.html

      1
  5. Supernova

    They have a huge tax liability, particularly with Walden which has a very low cost basis.

  6. Tan

    Are there any tax liability pursuing to the sale of Brazil operations? Also if you can shed some light on the potential tax implications, if any, on the sale of the rest of Latam business when it happens.

  7. dt

    Regarding taxes, WhtKngt might be able to shed some more light on this, but this is what I found so far (not a tax expert).

    Brazil operations have been sold at carrying value as of Q1’21, so my understanding is that there will be no income taxes on the sale. From the latest 10Q:

    “During the first quarter of 2021, the Company recorded a loss of approximately $32,400 related to the Brazil disposal group, which was classified as a Discontinued Operation, in order to write down the carrying value of those assets to their estimated fair value less costs to sell as of March 31, 2021, in accordance with ASC 360-10, “Impairment and Disposal of Long-lived Assets” (ASC 360-10). The estimated fair value was based on the sale agreement for the disposal group that was announced on November 2, 2020,”

    As for Walden and Peru/Mexico operations, the company still has some loss carryforwards which it might be able to utilize if the assets are sold above carrying values. From 10K:

    “The Company has $634,200 of US federal net operating loss carryforwards that expire from 2035 to 2036 and $67,600 of US federal net operating loss carryforwards that do not expire. The Company has $168,100 of deferred tax assets for US state net operating loss carryforwards that expire from 2021 to 2040 and $7,500 of deferred tax assets for US state net operating loss carryforwards that do not expire. The Company has $509,200 of foreign net operating loss carryforwards that expire from 2023 to 2030. The Company has $152,700 of tax credit carryforwards that do not expire and $76,400 of interest carryforwards that do not expire.”

    Assets/liabilities held for sale include Brazil and Walden. Deducting the amount to be received for the Brazilian assets, leaves c. $600m of carrying value of Walden. Thus LAUR might be on the hook for paying taxes on the $900m gains (sale price less the carrying value) after Walden sale is completed. This amount might be further reduced by the loss carryforwards as per above (not entirely sure if NOLs can be utilized for this purpose).

    As for taxes on Peru and Mexico operations, by my calculations, these are currently carried on the books at c. $1bn. (after deducting assets held for sale as well as net cash/debt). So if the sale happens at the write-up’s valuation of $2.8bn, the company would recognize pre-tax gain of $1.8bn.

    Taking 21% tax rate and assuming zero benefit from NOLS, gain on sale taxes (for Walden/Peru/Mexico) might amount to $567m, which still leaves plenty of leeway (write-up valuation of $4.3bn vs current market cap of $2.8bn).

    Again, I might be way off with this, but at least directionally this should be correct. Interested in hearing other opinions on how to assess expected tax leakage in these types of situations.

    6
  8. WhtKngt

    It is my understanding that the company expects $1.2B in NET proceeds from Walden. $1.48B sticker price. Add that to the net cash position they currently have… i would caveat that a) i believe they are currently using that cash position to do daily repurchases and that b) to clarify the Net Debt debate, the company calls out $286mm in NET debt on the 1Q call. That was prior to the closing of the Brazil Sale.

  9. Supernova

    Stifel estimates a 20% tax rate on gains and a $1.06B tax liability.

    Stifel sum-of-the-parts (as of May 6th):

    Brazil 10.7x TTM EBITDA = $818MM
    Mexico 6.5x TTM EBITDA = $734MM
    Peru 10.5x TTM EBITDA = $2,263MM
    Online 8.6x TTM EBITDA = $172MM
    Corporate ($50MM)
    =EV $5,294MM
    Taxes ($1,059MM)
    Deal costs ($53MM)
    Corp. wind-down costs ($50MM)
    Net debt as of 1Q21 ($440MM)
    =Equity value $3,692
    share count 195.0
    Fair value $18.93

    2
    1. Evg

      Hi, thanks! Looks very interesting to compare to the assumptions in the write-up.

      A couple of questions:
      1. Online 8.6x TTM EBITDA – where does this segment come from? I wasn’t able to find it in the write-up and in the presentation it was mentioned as already discontinued
      2. I assume you forgot to add Walden valuation in the EV calculation (in the sum it adds up with it)
      3. Why is corporate just 50 mln? Is it going to be completely eliminated after this year?
      4. Aren’t TTM EBITDA for Peru and Mexico looking very aggressive? Based on 1Q2021 presentation (page 18) EBITDA is growing from 185 to 280 YoY. Is this realistic? Does the management have a good track record in their forecasts?

    2. nuggy5

      Do those numbers add up to $5.3bn in EV? Or am I missing something.

  10. Supernova

    Well, this is Stifels assumptions not mine. But here is what I know…

    1. & 2. Online is mainly Walden and I accidently entered the TTM EBITDA of $172MM as it’s EV…the EV of this segment is 8.6x $172MM, or $1,480MM.
    3. I guess that’s there assumption. Once Mexico and Peru are sold there is nothing left.
    4. Don’t know.

    1
    1. BO

      There is a mistake in Stifel table, you did not subtract the corporate. Ev should be 50m lower…
      @Supernova, any thought on the time frame for the final liquidation?

      1
    2. Evg

      Thanks for the replies, very helpful to see different assumptions

      In the end the situation looks pretty interesting. Assuming that the Walden gets sold as expected, we have still quite some room for error on the side of Peru/Mexico assets and taxes.

  11. Writser

    Very interesting idea WhtKngt, thanks for sharing. Kind of interesting how this idea seems to be completely ‘off the radar’.

    I’m no expert on Peru but it seems worth mentioning that a former teacher / teacher union leader from the ‘Free Peru’ party just won the general elections, unexpectedly. The ‘Free Peru’ party (just quoting Wikipedia here) describes itself as being “a left-wing socialist organization” opposed to neoliberalism and [..] seeks “to rescue the minimized, almost imperceptible and dying State from the subjugation of market dictatorship.

    No idea how that is going to play out but probably LAUR’s flagship Peru asset is a bit less valuable / marketable now?

  12. jwestern

    What was the nature of that distribution Wengen made to KKR, which increased KKR’s ownership in Laureate — where did those shares come from? Was that distribution fair to minority holders of Laureate?

    1. Lukas

      Wengen distributed its own LAUR shares to its own shareholders. Why wouldn’t it be fair? As I understand Wengen has been holding LAUR since 2007. You can find a bit more on their history in the proxy:

      “In August 2007, we were acquired in a leveraged buyout by a consortium of investment funds and other investors affiliated with or managed by, among others, Douglas L. Becker, our Chairman and Chief Executive Officer and founder, Steven M. Taslitz, a director of the Company, Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates, “KKR”), Point72 Asset Management, Bregal Investments, StepStone Group, Sterling Partners and Snow Phipps Group (collectively, the “Wengen Investors”).

      https://www.bamsec.com/filing/104746915007679?cik=912766

      3
  13. snowball

    For what is worth, Morgan Stanley reinstates LAUR with a Overweight rating and a price target of $20.4, not too far from Stifel’s fair value estimate of $18.9 and WhtKngt’s target of $21.9.

    This may explain today’s upward price action.

    1. sambor

      Does anybody plan to buy put options anticipating cash distribution?

      1
    2. snowball

      What’s the play? Option strike prices will be adjusted downward ex the special dividend.

  14. George

    For clarity, does anyone have a guess as to ebitda per share after Walden sale? Have done the math-which, if correct, seems to indicate an even higher value. However am not confident have done it right.

  15. snowball

    Is LAUR significantly under-valued ex special dividend? Is there any near-term catalyst remaining? Should we close the trade?

    1. rc99ar

      We should see the 10-Q soon, maybe this week. From a valuation standpoint, if nothing has changed I’m inclined to add below $10. Management has shown they can execute.

    1. tlhk

      Did you guys receive the full amount or 30% has been deducted as withholding tax?

    2. fishwithwings

      It looks like it was paid out as Interim Liquidation dividend which i’m guessing will be taxed as a dividend.

    3. fishwithwings

      I don’t see it on my Interactive Brokers statement.

  16. dt

    LAUR reported strong Q3 results and raised guidance for 2021 second time in a row. This lifted shares by almost 20%. The special situation part of the investment mostly played out and we are closing the case with 32% return in 4 months. Further upside depends on the valuation or potential sale of Peru/Mexico assets.

    WhtKngt – thanks for sharing this and let us know if you have a different opinion.

    Q3 results:
    – Revenues increased 10% YoY and 13% ex. FX impact.
    – Adj. EBITDA increased by 51% YoY.
    – Total student enrollments now stand at 390k vs 335k last year.
    – Current performance and enrollments are now above pre-COVID levels.

    2021 outlook is now:
    – Revenues in the range of $1.075bn – $1.085bn, 8%-9% YoY growth vs previous guidance of $1.025bn – $1.065bn.
    – Adjusted EBITDA in the range of $247m – $253m, 34%-37% growth YoY vs previous guidance of $205m – $215m.

    2021 guidance is very close to the previous 2022 outlook and enrollments are even higher (disclosed in Q1 conf. call). 2022 outlook was 350k with $1.08bn revenues and $280m adj. EBITDA (2022 guidance was not mentioned in the current quarter). Makes sense to think that the company will be able to beat the previous 2022 figures confidently.

    Most of the growth came from online – pre-COVID only 27% of tutoring hours were spent digitally, while now the figure stands at 40%-60%. The company also intends to continue to invest in its digital capabilities (means more business and higher margins).

    Currently, LAUR trades at 7.2x adj. EBITDA E2021, just above the lower limit of historical range 6.5x – 9x from 2017- early ’20. At the time the company was loaded with debt and now sits at a substantial net cash position. However, then it was also assets in US whereas now only Mexican/Peru operations remain, which arguably should deserve a lower multiple.

    At 8x the previous 2022 adj. EBITDA guidance ($280m) LAUR would have an enterprise value of $2.2bn. Coupled with $410m net cash this would result in $14.6/share target price. Obviously, this is an overly simplistic valuation and $280m EBITDA figure for 2022 might be overly conservative, but it shows that the business is probably not far from being fairly valued.

    In case of a sale, I have no idea what the taxes for Peru/Mexico could amount to but these would likely deduct a dollar or two per share. Also it is not clear when and if management plans to sell the remaining businesses – the “financial recovery” kind of happened already, however, there were zero comments on the sale process in Q3 earnings call.

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