(Reuters) - Companies providing schools with supplemental learning products are maybe not best suited to being publicly listed, and several could be taken private as they struggle for government funding.
School Specialty Inc SCHS.O, Archipelago Learning Inc ARCL.O, Scientific Learning Corp SCIL.O and Cambium Learning Group Inc (ABCD.O) sell technology products and other learning aids mainly to K-12 schools -- from kindergarten through to the end of secondary education.
These K-12 schools depend heavily on tax collections to fund their buying, and the sector is hurting as education funding stagnates.
Total government spending on K-12 education rose by little more than 1 percent in the 2009 fiscal year, a far cry from the 6-7 percent growth since the late-1970s, according to data from the National Center for Education Statistics and BMO Capital.
Private equity companies, which tend to take a longer term view, could be drawn to the sector by the prospect of baby boomer grandchildren entering the education system.
“They can look 5 years out and see that the number of children entering elementary schools is going to accelerate as this demographic bubble -- the children of the baby boomers -- are going to start having their own children,” said Trace Urdan, an analyst at Wunderlich Securities.
School Specialty, whose shares have more than halved this year to lifetime lows below $6, is seen as a next target for private equity.
“It’s a relatively large company and has a unique distribution infrastructure,” said an investment banker, who works closely with companies in the K-12 education business and who asked not to be identified. “There’s a lot of interesting value there that can be unlocked in a take-private transaction.”
School Specialty, which is still looking for a replacement for its chief executive, who stands down in February, could squeeze out a 15-20 percent premium from private equity, and then maybe consider returning to the market when valuations are stronger, said Wunderlich’s Urdan.
Other firms on private equity radar include Archipelago Learning and Scientific Learning. McGraw-Hill’s MHP.N education division, which is being spun-off from the parent, is also likely to be a target.
A buyout battle for Renaissance Learning Inc RLRN.O between Plato Learning and private equity firm Permira Funds bid up the price and could herald more such deals.
Permira is scouting for more buyouts in the sector, according to a source with knowledge of the fund’s thinking, but who did not want to be identified as talks are not public.
“There is scarcity value associated with K-12 targets that can be considered attractive platforms. There just aren’t a lot of independent targets generating revenues in excess of $50 million,” said Joshua Schwartz, founder and managing director at East Wind Advisors.
He added that any private equity firm seeking to make a platform investment in education would likely need to offer a premium to buy something with scale. Several companies in the market are part of larger groups such as Scholastic Corp (SCHL.O), Pearson Plc (PSON.L) and McGraw-Hill.
These K-12 education companies are heavily dependent on government budgets, and irregular revenue streams may be better handled by private firms away from stockholders’ gaze.
“They have very bumpy revenue streams. Month by month, revenues aren’t consistent. Year by year, revenues aren’t consistent, even in a steady economy,” said Robert Lytle, partner at private equity advisory firm Parthenon Group.
“That can cause an issue in a publicly held company that tends to be evaluated on a quarter to quarter basis.”
Private equity has been active in childcare, buying companies such as Bright Horizons Family Solutions, Kindercare Learning Centers, and Nobel Learning Communities. They may now be ready to look further down the education process at the K-12 market as demographic changes could pay off in 5-10 years.
East Wind Advisors’ Schwartz said some companies had not benefited from being public, and if they remain at a single digit EBITDA multiple for a long time, it makes sense to go private.
In an uncertain funding environment, where deals are being called off or delayed, these companies may be a preferable option.
“They are growth companies, which are relatively stable, so they are able to engineer deals and get financing for them,” said William Kucera, partner at law firm Mayer Brown.
Reporting by Megha Mandavia in Bangalore, Editing by Ian Geoghegan