Education Services Report - Baird

M&A Market Analysis and Capital Markets Update September 2015

Education Services Report

Overview of Sector Trends, Capital Raising and M&A Activity

Education Services Investment Banking

Andrew Snow Managing Director asnow@ +1.312.609.4972

Peter Kies Managing Director Head of Technology & Services pkies@ +1.414.765.7262

Dan Alfe Director dalfe@ +1.312.609.4922

European Investment Banking

David Silver Managing Director Head of European Investment Banking dsilver@ +44.207.667.8216

Jonathan J. Harrison Managing Director European Investment Banking jjharrison@ +44.207.667.8414

Martin Luen Director mluen@ +44.207.667.8381

Asia Investment Banking

Anthony Siu Managing Director Head of Asia Investment Banking asiu@.cn +86.21.6182.0981

Satoshi Matsumoto Managing Director Director of Japan M&A smatsumoto@ +1.646.557.3201

In This Issue

Page

? Quarterly Report Overview.................................................................................1 ? Macroeconomic Commentary .............................................................................2 ? Policy News........................................................................................................3 ? Sub-Sector Commentary and Company News .....................................................5 ? Baird's Equity Research Commentary...............................................................10 ? Share Prices and Valuation ..............................................................................12 ? Select Relevant Operating / Valuation Metrics .................................................13 ? Equity Offering Market Overview .....................................................................14 ? Education Services Equity Activity ...................................................................15 ? Education Services M&A Activity ......................................................................16 ? Venture News...................................................................................................18 ? Company Spotlight ...........................................................................................19 ? Baird's Education Services Expertise................................................................21 ? Upcoming Education Industry Events...............................................................22 ? Education Current Market Multiples .................................................................24 ? Education Current Margins and Select Other Ratios .........................................26 ? Baird's Education Services Team ......................................................................27 ? Disclaimers and Other Disclosures ...................................................................28 ? Glossary of Terms & Other Important Information ..........................................29

The following report has been prepared by the Global Investment Banking Department of Robert W. Baird & Co. This report is an overview and analysis of consolidation trends and is not intended to provide investment recommendations on any specific industry or company. A complete listing of all companies covered by Baird U.S. Equity Research and applicable research disclosures can be accessed at . You can also call 1-800-792-2473 or write: Robert W. Baird & Co., Equity Research, 24th Floor, 777 E. Wisconsin Avenue, Milwaukee, WI 53202.

Disclaimers and Other Disclosures on page 28

Quarterly Report Overview

The Education Services report, created by Baird's Global Investment Banking Department, highlights capital markets trends and events that impact companies within these sectors. Detailed below are the report's five areas of focus. Within each group, companies are represented from around the globe; however, the majority of publicly-listed education providers are concentrated in the U.S., Brazil and China. The statistics at the right of each group represent the current mean for the group, and the arrows indicate movement up or down from last quarter.

1

Primary & Secondary Education

2

Higher Education

Benesse Holdings Bright Horizon Family Solutions Bright Path Early Learning Educomp K12, Inc.

New Oriental Education & Technology Group

Nord Anglia

Scholastic

Xueda Education Group

Quarterly Change in Stock Price

(1.7%)

American Public Education Anhanguera Educacional Participacoes Apollo Group Bridgepoint Education Capella Education Career Education DeVry Education Management Corporation Est?cio Participa??es

China Distance Education Holdings Franklin Covey GP Strategies

Grand Canyon Education

ITT Educational Services

Lincoln Educational Services Corporation

National American University

Navitas Limited

Strayer Education

Universal Technical Institute

Quarterly Change in Stock Price

(25.6%)

Learning Tree International

Vocation Limited

Quarterly Change in Stock Price

LTM EBITDA Multiple

11.4x

10.5x

May 31

August 31

6.2x May 31

4.7x August 31

9.7x

8.0x

4

Education Technology

2U Chegg Quinstreet Rosetta Stone

Smart Technologies Sonic Foundry Tribal Group

5

Diversified Education Services & Publishing

Houghton Mifflin Informa John Wiley & Sons

Pearson Wilmington Group Wolters Kluwer

_____________________ Source: Capital IQ. As of August 31, 2015. Please see glossary on page 29 for definitions and other important information.

(27.0%)

Quarterly Change in Stock Price

(8.0%) Quarterly Change in Stock Price

(4.9%)

May 31 13.1x

May 31 13.9x

May 31

August 31 12.5x

August 31 13.3x

August 31

Robert W. Baird & Co.

1

Macroeconomic Commentary

OECD Real GDP

Growth rate compared to previous quarter, seasonally adjusted

1.1% 0.9% 0.7% 0.5% 0.3% 0.1% (0.1%)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2011

2012

2013

2014

2015

_____________________ Source: OECD.

Consumer Confidence

Percent change from previous year

20.0% 10.0% 0.0%

17.4%

2.7%

6.0%

(10.0%)

(20.0%) (30.0%)

(19.2%)

_____________________ Source: St. Louis Federal Reserve, Confederacao Nacional da Industria, National Bureau of Statistics of China, GFK NOP (U.K.) and The Conference Board.

Unemployment Rates

Seasonally adjusted

10%

United Kingdom

Germany

China

Brazil

U.S.

8%

6%

4%

2%

0% Jan-13

Jul-13

Jan-14

Jul-14

Feb-15

Aug-15

_____________________ Source: U.K. Office for National Statistics, Deutsche Bundesbank, Ministry of Human Resources and Social Security of the PRC, IBGE and Bureau of Labor Statistics.

_____________________ Note: Robert W. Baird & Co. Market Commentary.

Economic Expectations

Global growth is projected at 3.3 percent in 2015, marginally lower than in 2014, with a gradual pickup in advanced economies and a slowdown in developing economies. In 2016, growth is expected to strengthen to 3.8 percent. In emerging market economies, the continued growth slowdown reflects several factors including lower commodity prices and tighter external financial conditions, rebalancing in China and economic distress related to geopolitical factors. A rebound in activity in a number of distressed economies is expected to advance growth in 2016.

Market Notes

? Advanced Economies ? Growth in

advanced economies is projected to increase from 1.8 percent in 2014 to 2.1 percent in 2015 and 2.4 percent in 2016. The underlying drivers for acceleration in consumption and investment in the U.S. - wage growth, labor market conditions, easy financial conditions, lower fuel prices, and a strengthening housing market - remain intact

? Euro zone ? Economic recovery in the

euro area seems broadly on track, with a generally robust recovery in domestic demand and inflation beginning to increase.

? Japan ? Growth in the first quarter of

2015 was stronger than expected, supported by rising capital investment. However, consumption remains sluggish and more than half of quarterly growth stemmed from changes in inventories.

? Emerging market and developing

economies ? In 2016, growth in emerging market and developing economies is expected to pick up to 4.7 percent, largely on account of the projected improvement in economic conditions in a number of distressed economies, including Russia and some economies in the Middle East and North Africa.

Robert W. Baird & Co.

2

Policy News

United States

? Hillary Clinton Rolls Out $350 billion, 10-year College Affordability Plan ? Hillary Clinton rolled out her college

affordability plan Monday, pledging to voters in New Hampshire that "costs won't be a barrier" to secondary education in a Clinton administration. She touted the plan as a way to lower college costs while at the same time

making it easier for American families to send their children to school. (CNN)

? Mayoral control of New York City public schools ? Under a new mayor and chancellor control, innovations have

been introduced, including universal preschool for four year-olds; transformation of several struggling schools into community schools; and substantial investment in new art teachers, programs and facilities. New York state legislators and the public are again debating over mayoral control of New York City public schools. (USNews)

? U.S Department of Education Announces New Grants for Charter Schools Serving Low-Income Students ? The

U.S. Department of Education announced a $4 million grant competition for planning and launching high-quality public charter schools through the non-state educational agency grant program. In addition, operators of existing high-quality public charter schools can receive funding to share information with other schools about best practices. (US Dept of Education)

? Federal Education Funding Plummeting ? Over the last five years, Congress has cut federal funding for K-12

education by nearly 20 percent, about five times more than overall spending cuts. Education spending as a percentage of all government spending has also consistently decreased over the last five years, down to just over 1 percent in 2015 from 1.27 percent in 2011. (USNews)

United Kingdom

? UK Law Targets Extremism in Schools ? The law, an unusual measure that requires teachers, including at

preschools, to report extremist leanings or behavior by students to police in the U.K., has been enacted as the government steps up its efforts to counter terrorism at home and abroad. The provision applies to all public officials, including health workers and local government employees, requiring them to alert authorities if they suspect someone is at risk of becoming radicalized. (WSJ)

? Michael Gove's School Reforms `ignored' rise in pupils' Mental Illness ? A former health minister has claimed

Michael Gove quietly downgraded the importance of mental health in schools during his time at the Department for Education amid an explosion in the number of young people falling ill. (The Guardian)

? New Reforms to Raise Standards And Improve Behaviour ? Nicky Morgan announces new measures to ensure

every child leaves school with world-class qualifications in crucial subjects. The plans underline the government's clear one-nation agenda - giving every child the chance to go to a great school, securing them a brighter future and giving families the assurance that their children are getting the very best education and opportunities. (GOV.UK)

? New ?10,000 Grants to Continue Drive to Eliminate Iilliteracy ? School reform minister Nick Gibb announces new

grants to help primary schools spread their reading expertise to other schools. Primary schools that excel at teaching pupils to read will receive ?10,000 to help them spread their expertise to other schools. To ensure as many young people as possible develop a strong grasp of reading early on, the grants will be made available to 8 groups of schools, led by top-performing primaries. (GOV.UK)

Robert W. Baird & Co.

3

Policy News

Germany

? German Companies Support US-German Initiative on Education and Training ? The signing of a Joint Declaration

between the United States of America and the Federal Republic of Germany is an important step to enhance vocational education in the US and a strong signal for a thriving transatlantic relationship. (AHK)

Brazil

? Brazil To Extend College Loan Program This Year ? Brazil will offer a second round of its marquee college loan

program this year, extending more resources to education despite budget cuts that have hit much of the federal budget. Education Minister Renato Ribeiro Janine confirmed the second round of financing for the student loan program known as Fies. (Reuters)

China

? China Increases Subsidy to Support Compulsory Education ? A subsidy of $21.4 billion has been given to support

compulsory education in rural areas. The volume marked a rise of 6.6%, or 8.1 billion yuan, from last year. China requires children to receive nine-year compulsory education with the age range from 6 to 15. (China Education)

? China Invests Heavily on Children's Education ? Conditions for China's most humble elementary schools have

improved significantly since the year's beginning. "More than 4 million rural kids will benefit from the national project to extend digital educational resources," according to the Ministry of Education. (China Education Sector)

? College Graduates Get Extra Decade to Repay Student Loans ? College and graduate school graduates will have

up to 10 more years to repay their student loans so they will be face less financial pressure. Students will now have 20 years to repay the loans they take out to finance their higher education. (Caixin)

Japan

? Japan to Introduce Mandatory English Test for Junior Highs ? The Japanese education ministry said Friday it will

newly introduce a mandatory English proficiency test for junior high school students nationwide in 2019 as part a new plan to improve English skills of junior high and high school students. (News on Japan)

Australia

? More Students from Farming Families to Receive Youth Allowance ? More dependent students who live away from

home could qualify for the payment worth up to $426.80 a fortnight. National party senator Bridget McKenzie said the removal of the family assets test would allow 4,100 more students to claim the allowance. (The Guardian)

? Higher education reform measures by the governement ? The Government is committed to having an affordable

and sustainable higher education system. From Jan 2016 the Government would extend the demand driven funding system to include all higher education diplomas, advanced diplomas and associate degree courses. ()

? Australia's second P-TECH school to be set up in Ballarat ? Australia's second P-TECH pilot school, which brings

industry-led vocational education to students, will open in Ballarat with the backing of IBM. The school, to be called Federation College, will be located within Federation University, and help students towards a diploma, advanced diploma or associate degree in a STEM (science, technology, engineering and maths) related discipline. (Financial Review)

_____________________ Note: Policy news represents selected highlights. Please click on the associated link to view the complete report / article.

Robert W. Baird & Co.

4

Sub-Sector Commentary and Company News

Despite lingering macroeconomic pressures from the Great Recession, the global education industry continues to benefit from favorable, long-term secular trends. Population growth in most developed nations, combined with a continuing shift from industrial to service-based, knowledge economies will drive demand for greater educational attainment. As the public sector struggles with funding challenges, aging infrastructure and generally disappointing student outcomes, nimble, technology-enabled content and service providers, which can efficiently deliver high quality solutions, stand to benefit. The following section highlights selected recent/current trends and important news and events within each of the identified education sub-sectors.

1

Primary & Secondary Education

Key Products & Services

? Childcare/Nurseries; EMOs/Charter Schools; Teacher Professional Development; and Tutoring

Sector Themes

? The number of families receiving their first choice of

primary school has fallen in many parts of England, as a baby boom puts a squeeze on classroom places. The UK's birth rate has been rising in recent years, with more than 700,000 live births in 2011 compared with 500,000 10 years before

? The OECD singled out China's education system in its

latest economic survey, warning that it is not producing graduates and workers with the right skills for a servicesbased economy

? The White House recently detailed a new $80 billion

proposal intended to help families afford child care as a

part of a post-State of the Union policy push

? Childcare costs are set to rocket in Australia if the

Productivity Commission's recommendations on fees are

adopted

Public Company Earnings & Corporate Events

? July 14th ? Nord Anglia Education, Inc. (NYSE: NORD) announced

financial results for the third quarter of fiscal 2015, the three month period ended May 31, 2015. Revenue increased 22.7%, from $138.5 million in the same period of fiscal 2014 to $170.0 million. Adjusted EBITDA increased from $42.6 million to $47.9 million. Adjusted Net Income was $23.6 million or $0.24 per diluted share compared to $14.5 million or $0.16 per diluted share reported a year ago.

? July 21st ? New Oriental Education and Technology Group Inc. (NYSE:

EDU), announced results for the fourth fiscal quarter and fiscal year ended May 31, 2015. Reported net revenues increased by 9.5% YoY to $1.25 billion, compared to $1.14 billion a year ago. Operating income was $151.4 million, in comparision to $197.6 million a year ago. Net income attributable to the company decreased by 11.5% to $190.9 million, compared to $215.7 million a year ago. Diluted net income per share attributable to the company was $1.21, compared to $1.37 a year ago.

? July 23rd ? Scholastic Corporation (NasdaqGS:SCHL) announced

results for the fourth quarter and fiscal year ended May 31, 2015. Total revenues from continuing operations were $1.64 billion, an increase of 5% compared to $1.56 billion in 2014. Income from continuing operations was $32.9 million, compared to $10.4 million in 2014. Operating income increased by 14%, to $79.6 million, compared to $69.6 million a year ago. For fiscal 2015, earnings per diluted share from continuing operations excluding one-time items, increased 10%, to $1.29 versus $1.17 in fiscal 2014.

LTM Primary & Secondary Education Performance

20%

Primary & Secondary Education

NASDAQ

S&P 500

15%

10%

5%

4.3%

0%

(1.6%)

(5%)

(3.7%)

(10%)

(15%)

(20%) 8/31/14 10/22/14 12/13/14 2/3/15 3/27/15 5/18/15 7/9/15 8/31/15

? July 29th ? BrightPath Early Learning Inc. (TSXV:BPE) reported financial

results for the second quarter of fiscal 2015, the three month period ended June 30, 2015. Revenue increased 5.3% YoY from CAD13.2 million to CAD13.9 million. Adjusted EBITDA increased 12.5% YoY from CAD1.6 million to CAD1.8 million. Net income increased YoY from a loss of $0.5 million to a profit of $0.4 million.

? July 31st ? Benesse Holdings, Inc. (TSE:9783) announced financial

results for the first quarter ended June 30, 2015. For the period, the company reported net sales of ?107.4 billion, operating income was ?623.0 million, ordinary income was ?321.0 million and net loss was ?419.0 million compared with net sales of ?115.5 billion, operating income was ?5.0 billion, ordinary income was ?4.7 billion and net loss was ?13.6 billion for the same period a year ago.

? August 13th ? Xueda Education Group (NYSE: XUE) announced its

unaudited financial results for the quarter ended June 30, 2015. Total net revenues increased 0.4% to $121.3 million from $120.8 million. Net income attributable to Xueda Education Group was $10.7 million, compared to $15.3 million. Non-GAAP net income per ADS attributable to Xueda Education Group was $0.19, compared to $0.27.

? August 13th ? Educomp Solutions Limited (BSE:532696) reported

financial results for the first quarter ended June 30, 2015. For the quarter, on a consolidated basis, the company reported net sales of INR 1,432.3 million compared to INR 1,436.4 million a year ago. Loss from operations before other income, finance costs and exceptional items of INR 137.3 million compared to INR 146.6 million a year ago. Net loss per share was INR 6.96 compared to INR 28.08 a year ago.

In the Media

? New bill would support innovative internet pilots for students.

New legislation introduced in the U.S. Senate would support innovative

methods to give students access to the internet and digital tools outside

of classrooms. (eSchool News)

? English pupils' maths scores improve under east Asian approach.

Schools in England experimenting with east Asian teaching methods

have seen an improvement in children's mathematics skills after just one

year, according to a study.. (The Guardian)

? Early literacy 'key' to closing education gap. Improving the

language skills of young children from deprived backgrounds could be the key to closing Scotland's attainment gap, according to a report. The research by the Read On, Get On campaign suggested one in five children growing up in poverty is unable to read well by the time they finish primary. (BBC)

? Calculator ban 'has improved children's numeracy skills',

ministers claim. New government figures in England suggest a record number of children are passing maths tests thanks to classroom calculator ban. Teachers said banning calculators wasn't the reason for a raise in standards in the subject but attributed the results to quality teaching. (The Telegraph)

_____________________ Source: Capital IQ as of August 31, 2015. A list of companies comprising each index may be found on page 1.

Robert W. Baird & Co.

5

Sub-Sector Commentary and Company News

2

Higher Education

Key Products & Services

? Traditional Colleges & Universities; Online Colleges & Universities; Vocational Training; and Online Enablers

Sector Themes

? Brazil continues to make higher education a priority with

enrollment more than doubling over the last 10 years

? Institutions now serve more than 7 million people

? Almost half of the English Universities plan to expand their

student intake over the next five years, with some setting ambitious targets to increase recruitment by as much as 50%, according to a survey by the Guardian. Many universities will look overseas to boost their application rates. A fast-growing source of undergraduates for English universities is EU students ? who are subject to similar funding rules to home UK students and will also now be exempt from cap on recruitment

? Numerous collegiate institutions face federal scrutinity over

the use of taxpayer funds according to the United States Department of Education

? Findings from a survey released by Kaplan Test Prep show

that well-connected applicants and legacies have a real college admissions advantage, confirming the results of a 2011 Economics of Education Review study

? Enrollment in Korean language courses at U.S. colleges and

universities showed the largest percentage growth of any foreign language

Public Company Earnings & Corporate Events

? July 26th ? Navitas Limited (ASX:NVT) reported results for the year

ended June 30, 2015. Reported revenue for the period was $980.3 million compared to $878.2 million a year ago. Underlying EBITDA was $163.1 million compared to $144.9 million a year ago, 13% up on the prior year. Diluted EPS was 19.1 cents compared to 13.7 cents a year ago.

? July 28th ? Capella Education Company (NASDAQ: CPLA) announced

financial results for the second quarter ended June 30, 2015. Revenues were $108.0 million, compared to $104.8 million in the second quarter of 2014, an increase of 3.1%. Operating income was $17.2 million, compared to $15.5 million for the same period in 2014. Net income for the second quarter of 2015 was $10.3 million, compared to $9.0 million for the same period in 2014. Net income per diluted share was $0.83, compared to $0.72 for the same period in 2014.

? July 29th ? Strayer Education, Inc. (Nasdaq:STRA) announced financial

results for the second quarter ended June 30, 2015. Revenues for the second quarter ended June 30, 2015 decreased 3% to $109.8 million compared to $112.7 million for the same period in 2014, principally due to lower enrollment and lower revenue per student. Net income was $11.9 million compared to $12.9 million for the same period in 2014.

? June 29th ? Apollo Education Group, Inc. (NasdaqGS:APOL) announced

financial results for the third quarter ended May 31, 2015. Net revenue decreased by 14.1% to $681.4 million, compared to $793.6 million for

LTM Higher Education Performance

Higher Education

NASDAQ

S&P 500

20%

10% 0% (10%)

4.3% (1.6%)

(20%)

(30%)

(40%)

(50%) 8/31/14 10/22/14 12/13/14 2/3/15

3/27/15 5/18/15

7/9/15

(46.3%) 8/31/15

the third quarter of 2014. Net income attributable to the company was $48.1 million, compared to $66.0 million a year ago. Diluted income per share was $0.44, compared to $0.59 a year ago.

? July 30th ? ITT Educational Services Inc. (NYSE:ESI) reported results for

the second quarter ended June 30, 2015. Reported revenue decreased to $214.2 million, compared to $238.1 million a year ago. Net income was $0.7 million, compared to $0.4 million a year ago. Earnings per diluted share was $0.03 against $0.02 a year ago.

? August 6th ? Career Education Corporation (NASDAQ: CECO) reported

operating and financial results for the second quarter ended June 30, 2015. Revenues for the second quarter decreased 6% to $174.8 million compared to $186.2 million for the same period in 2014. Adjusted EBITDA was ($4.2) million compared to ($19.5) million for the second quarter of 2014.

? August 10th ? American Public Education, Inc. (NASDAQ:APEI)

announced financial results for the second quarter ended June 30, 2015. Total revenue for the second quarter of 2015 decreased 6.1% to $80.3 million, compared to total revenue of $85.5 million in the second quarter of 2014. Income from operations before interest income and income taxes in the second quarter of 2015 was $11.6 million, compared to $15.8 million in the second quarter of 2014. Net income for the second quarter of 2015 was $7.1 million, or $0.42 per diluted share, compared to net income of $9.8 million, or $0.56 per diluted share for the second quarter of 2014.

In the Media

? New loans scheme to make masters students mobile. The

Erasmus+ Master Loan Guarantee Scheme launched for post graduate students will receive around 500.0 million from the budget of the huge Erasmus+ student mobility programme, which the European Commission says will help to raise up to 3.0 billion in loans to promote higher education. (Universityworld News)

? Education dept. takes steps to ease repayment for student-loan

borrowers. Obama administration is taking several steps to ease borrowers' repayment burdens and expand and remake Pay as You Earn policy. This policy would also make it easier for borrowers in the military to receive an interest-rate reduction on their student loans. (The Chronicle)

? Asia the next higher education superpower? Many Asian countries

are setting ambitious goals to expand and improve their higher education sectors. By 2020, China alone will account for 30% of the world's university graduates between the ages of 25 and 34. India is projected to add 300 million people to its workforce over the next 2 decades, which is equivalent to the entire U.S. population (Business Spector)

? Merging High School, College and Work to Fill the STEM Pipeline

? High schools are partnering with higher education institutions and business leaders to transform into academies with a focus on more quickly and efficiently preparing students for the workforce, with a focus on Science, Technology, Engeneering and Mathematics. (U.S. News)

_____________________ Source: Capital IQ as of August 31, 2015. A list of companies comprising each index may be found on page 1.

Robert W. Baird & Co.

6

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download