Potential Privatization – Upside TBD
This situation has grabbed my attention due to active and persistent open market share purchases by a controlling shareholder. I think that a full takeover of Afya might be brewing up behind the scenes.
The US-listed Afya Limited is one of the largest private medical undergraduate/postgraduate education providers in Brazil, operating 30 school campuses. The company has a dual-class share structure and is controlled by Bertelsmann, a large German media/education conglomerate.
Bertelsmann has held an indirect 25% economic and 46% voting stake in Afya since its inception and then bought it out from an investment vehicle in Aug’21 for $609m (or $26.4/share). One year later, in May’22, the German conglomerate did a private transaction with the founding family and acquired an additional parcel of voting shares for US$161m. The transaction was priced at $26.90/share, a huge premium to the $13/share market price at the time or $12/share currently. With this purchase, Bertelsmann raised its stake to 31%/57.5% effectively securing the control of Afya. The shareholder now controls 4/10 board seats, including co-chair role.
Right after this private transfer, Bertelsmann started to aggressively purchase Afya shares in the open market. This buying streak is still continuing with Bertelsmann persistently adding 40k-80k of AFYA shares every other day. The majority of these open market purchases have been done at around $14-$15+/share. According to the latest 13D/A, the most recent buy was on Feb 22, lifting Bertelsmann’s stake to 40.5%/59.3%. Afya’s founding family still owns 18% economic and 33% of voting rights.
This persistent accumulation of shares either suggests a pending takeover or that Bertelsmann thinks Afya is very cheap currently. There seem to be no other reasons to continue increasing the stake after the controlling ownership was reached in 2022. Bertelsmann is a very well-informed buyer with significant experience in the education space. Its other assets in the sector include Relias (online specialized and continued education provider for medical professionals in the US) and Alliant International University (which specializes in psychology, but also includes other medical training fields).
The timing of share purchases and potential takeover looks quite opportunistic. Afya shares are hovering at all-time lows, well below the $19/share IPO price in 2019 or the $25-$28/share average trading range that followed the IPO. The 2021 decline in Afya share price seems to partially correlate with the general sell-off in Brazilian equities prompted by the rapid interest rate increases as well Brazil’s pandemic and macro situation. Due to delays in capacity expansion and a significant amount of acquisitions done in 2021 (integration costs, etc.) Afya faced slowdown in organic growth and margin pressure. However, when the growth rebounded in 2022, Afya’s share price saw no recovery at all from its 50% drop since mid’21. The market most likely remains disappointed by the EBITDA growth given billions of Reals thrown at acquisitions.
Valuation is a tricky part as the company is heavily investing in expansion and doing tons of acquisitions (already over 20 since its IPO). These acquisitions were mainly done at a 4-5.8x adj. EBITDA (see presentation). Just this year, Afya completed its largest takeover yet (at 5.8x multiple), which is expected to lift EBITDA post synergies by around 15%. Pro forma for this acquisition the company trades at c. 7.8x adj. EBITDA. Meanwhile, its closest available peer, a pink-sheet-listed Brazilian private education player Cogna Educacao (COGNY) trades at around 6x forward adj. EBITDA. However, COGNY is significantly more levered and much more exposed to various lower-margin, non-medical education verticals. Compared to AFYA, COGNY’s overall growth has been flat/slightly negative in recent years (although management is expecting inflection this/next year), while adj. EBITDA margins are <30% vs 42%+ for AFYA.
A few more details on AFYA’s business are provided below. For more background on AFYA and Brazilian medical education market please refer to this VIC write up.
Afya provides undergraduate and postgraduate medical degree programs, residency preparatory courses as well as many various other courses in the medical field. It operates over 30 medical school campuses in Brazil. The company also has certain non-medical degree programs in other subjects, including business administration, accounting, law, etc. but regards these as non-core and basically has it in run-off mode (most were acquired during the medical roll-ups). Afya also has a portfolio of digital health service offerings (medical decision-making apps for physicians and nurses, scientific publication database, etc), which boasts an active user base of 286k physicians and students. Management has been positioning the digital segment as the main future growth driver and back in 2021 guided for digital segment revenue to reach the same level as the education segment in 5 years. The focus on digital segment growth has been emphasized by Bertelsmann during its stake purchase in May’22. Softbank has also invested in the company (Apr’21, US$150m convertible notes with 6.5% rate and $25.35/share conversion price) to fund the digital revenue growth. However, the digital segment traction has been much slower than expected so far and digital is still <10% of the total revenue mix for the company.