DEALTALK-Brazil education sector to boost bankers' dealflow
By Guillermo Parra-Bernal and Juliana Schincariol
SAO PAULO, Sept 4 (Reuters) - A wave of takeovers and initial public offerings in Brazil's thriving education sector - which has seen shares in the sector become the country's top performers - are expected to boost the deal-flow of investment banks grappling with the weakest local capital markets in almost a decade.
Encouraged by the success of larger rivals, Anima Educação SA and Grupo Ser Educacional SA are preparing to go public in spite of a rout in the local equity market. Shares of Brazil's four listed education firms are up a combined 18 percent this year, compared with the benchmark Bovespa stock index's 15 percent slump.
The prospect for deals is a boon for local investments banks such as Itaú BBA and global rivals including Goldman Sachs Group Inc struggling with Brazil's weak growth, rising borrowing costs and worries over government interference in the economy. The value of M&A deals in Brazil fell to an eight-year low in the first six months of the year, and an IPO recovery is failing to gain traction.
Brazil's $11 billion-a-year education industry has grown at double-digit rates in recent years as a tight job market demands a skilled labor force with better technical knowledge, stronger analytical abilities and proficiency in foreign languages.
Initial public offerings have turned into a feasible fundraising option for college operators, language schools and learning systems providers, bankers told Reuters, just as mergers and acquisitions propelled activity over the past two years. Bankers expect more listings and renewed M&A plans to take place within the next year as private-equity funds seek to either buy or exit investments.
"I can see the market absorbing new issues in the sector without having incumbents suffer for it," said Bruno Giardino, an analyst with Santander Investment Securities in São Paulo. "On the one hand, you have strong appetite for education shares and, on the other, consolidation trends remain dynamic."
Anima hired Bank of America Merrill Lynch and Itaú, which has handled about nine in every 10 deals in the sector in Brazil, to manage its IPO, sources told Reuters last month. Grupo BTG Pactual SA, Credit Suisse, Goldman and Banco Santander SA will handle Grupo Ser Educacional's offer.
It is not hard to understand why investors - who saw IPOs in Brazil yield a negative 15 percent return since 2005 - are so keen on new names in the education sector. The industry has not seen an IPO since Abril Educação's successful 371 million reais ($155 million) offering in July 2011.
The newfound interest in the sector is so strong that premiums in IPOs appear warranted, said Daniel Utsch, head of equity research at Banco Fator SA.
Currently, average enterprise value at Kroton Educacional SA , Anhanguera Educacional SA, Estacio Participações SA and Abril Educação SA equals 12 times estimated 2013 operating earnings, compared with five times for North American peers, according to HSBC Securities.
Government policy toward private-sector education companies, combined with operational data bolster such enthusiasm. Enrollments in formal and distance-learning courses are growing at an annual pace of 25 percent as income grows in Brazil, where only one in every five citizens has a college degree.
Access to universities faces bottlenecks and the quality of university education is among the poorest among the world's biggest countries. Last year, Brazil ranked 39 out of 40 in Pearson Plc's Global Index of Cognitive Skills and Educational Attainment.
President Dilma Rousseff's vow to work closely with private companies to boost both the availability and quality of education is seen as a sign that state meddling will be minimal. A number of industries from energy to finance saw Brazil's state intervene in the past couple of years, often curbing returns on investment.
Rousseff sees the existence of the Fies loan student program and the ProUni tax break plan to create scholarships in private colleges as crucial to boost enrollments by two-thirds at the end of this decade. In addition, lower house lawmakers passed a plan in June to funnel 75 percent of offshore oil royalties into education, down from Rousseff's 100 percent of royalties proposal.
The sector went through an M&A spree since 2007 that is showing no sign of subsiding. Part of the reason why valuations will stay high, both Santander's Giardino and Fator's Utsch said, are that education margins should keep widening thanks to expense reductions related to M&A integration.
The boom sparked by Kroton's $2.5 billion purchase of Anhanguera drove both companies' shares up 32 percent and 26 percent, respectively, since the deal was announced in April.
In recent months, Abril and buyout firms Actis LLP and H.I.G. Capital LLC snapped up a number of language schools. Grupo Positivo is considering spining off its education unit.
Recently Laureate Education Inc bought control of university FMU, adding to exposure in areas ranging from law to advertising and business administration. The FMU deal cost the U.S. company three times more than what rivals paid in recent sector deals, according to calculations by Grupo BTG Pactual SA analysts.
Estacio is negotiating the purchase of corporate training company Affero Educação, which is also considering a merger with rival Lab SSJ, local media said this week. The companies declined to comment.
But for Luciano Campos, an analyst at HSBC Securities, not all that shines is gold in Brazil's education sector. Forecasts for future enrollment rates may be over the top and markets could be underestimating aspects related to the impact of Brazil's economic slowdown on drop-out and delinquency ratios.
"We recognize that performance has been strong, but we also believe that some long-term issues are being overlooked," Campos wrote in a recent client note.
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