Monday, August 2, 2021

Laureate Education: Asset Sales, Informal Liquidation, RemainCo Cheap

After my RVI post, a reader pointed me to Laureate, a setup that rhymes with RVI -- a large asset sale that is obscuring value in the RemainCo which will also likely be sold.

Laureate Education (LAUR) is a global for-profit education company that went private in 2007 (KKR in an LBO), was re-IPOed in 2017, and at the time of the IPO owned or operated over 70 universities across 25 countries, about half the business was in Latin America.  The IPO had a lukewarm reception and the company pivoted to selling their assets, usually at multiples that well exceed where public markets were valuing Laureate.  Today, the company has a pending sale for their U.S. for-profit school (Walden University), once that deal closes with Adtalem Global Education (ATGE, fka DeVry) in Q3, the company will have a net cash position of $1.66B and down to just five universities in two countries (Peru and Mexico) that management is guiding to $280MM in 2022 EBITDA against a $2.9B market cap ($1.25B EV adjusted for the Walden closing).

Laureate is not done selling assets, while Peru and Mexico are presented as continuing operations in their filings, they make it clear that they're still entertaining offers for both segments (transcripts courtesy of TIKR).

From Q4 2020 Earnings Call:

"...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."

From Q3 2020 Earnings Call:

"However, we will continue to explore strategic transactions for our remaining operations in both Mexico and Peru, and we'll pursue opportunities that can generate superior value for our stakeholders, net of friction costs versus retaining those operations as a publicly traded company."

The strategy of focusing on Mexico and Peru seems unintentional and more just the pace and sequence of asset sales.  It is unlikely that a smallish U.S. headquartered company providing higher education in Mexico and Peru will be valued properly or have much need to be public.  Management agrees, they've been consistent and clear in their belief that the stock price doesn't reflect the intrinsic value of the company, and their plans to return capital to shareholders to close this gap.  A few more snippets from recent earnings calls:

From Q1 2021 Earnings Call (5/6/21, stock was trading at $13.70):

"In addition, I am pleased to report that our Board has approved an expansion of our stock repurchase plan by an additional $200 million, bringing the total authorization to $500 million. Since beginning the plan in November, we have repurchased approximately $250 million worth of stock. We continue to believe that returning capital to shareholders through stock buyback is very accretive use of capital for investors given the significant discount of our stock price versus the intrinsic value of the individual institutions in our portfolio."

From Q3 2020 Earnings Call: 

"Let me now close out my prepared remarks by providing some guidance on the use of our excess liquidity. Our capital allocation strategy remains unchanged: first, support our business operations; second, repay our debt only if needed; finally, return excess capital to shareholders in the most tax-efficient manner possible.

...the most tax-efficient manner to return capital to shareholders 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."

The company has been a significant buyer of their own shares and that has likely continued as their share repurchase authorization was increased alongside their first quarter earnings release (we'll see how much on Thursday when LAUR reports Q2 earnings) and will presumably be increased again or in the form of a tender following the closing of the Walden transaction.

In my usual back of the envelope way, here's the simple EV for LAUR following the sale of Walden (due your own due diligence if assuming Walden will close is a good assumption):

The 2022 EBITDA guidance includes corporate overhead, in 2020, the individual segments did $113MM in EBITDA for Mexico and $189.5MM for Peru respectively, any strategic buyer could likely cut the corporate overhead, so the EBITDA multiple is somewhere in the 4-4.5x range for proforma ongoing operations.  Their Brazilian segment was recently sold for close to 10x EBITDA.

And what might a tender offer look like?  I'm really just guessing here, but let's say they use roughly half of their net cash to do a Dutch tender and it gets done at $17/share, what might that do to the stock after an ultimate exit of the Peru and Mexico operations?  Below is a range of possibilities.

Looking at that scenario analysis, its probably best to think of the tender as a special dividend than shrewd capital allocation, although in the higher multiple scenarios it would begin to make a difference.

The big risk might be in the Peru segment, mostly for political reasons.  Laureate took a sizable ($418MM) write-down on their Chile segment in 2020 and sold it for a very cheap multiple (sub-2x EBITDA), in their words from their Q3 2020 earnings call, due to "the risks and uncertainties that the market perceives around operating higher education institutions in Chile given the current political and regulatory environment as well as the possibility of a new Chilean constitution that could come into effect as early as 2022."  Last month, Peru elected a new President, Pedro Castillo, that ran a similar far left campaign that investors fear will upend the economy with plans for a new constitution.  But maybe that's already priced in?  It could mean that a sale isn't imminent, instead the company waits for covid to fully get in the rear view mirror and more political certainty before selling the remaining businesses.  In the "Peru is only worth 2x" scenario, then the current market price is valuing Mexico at 8x, which is probably about right, hard to see a lot of downside here.

Other thoughts:

  • The proforma net cash number of $1.66B does include taxes paid on the Walden sale, its unclear to me what the tax basis is on the Peru and Mexico segments or what local taxes might be due, they do have some NOLs, Laureate seems at least tax sensitive and could do a stock-for-stock deal or sell the remaining company outright which would eliminate the corporate level taxes versus doing a piecemeal liquidation and then distributing the proceeds to shareholders after.
  • Laureate took a write-down on the value of the Laureate network brand name in the first quarter, which hints that it won't be used much longer and confirms that a two country RemainCo is not the end state for the strategic alternatives process.  They also exercised the right to terminate their corporate headquarters' lease early, it now only goes through 6/30/22.
  • Management's incentive package is tied to an undisclosed "Total Value Factor" which includes both total valuation and more interestingly speed as inputs, meaning there's alignment, less risk of management kicking the can to keep their jobs.
  • Vaccine rates in Mexico and Peru are well behind developed markets, there's significant foreign currency risk (although lessened a bit now that their USD debt is gone), and September is a big enrollment period for them, if the delta variant impacts enrollment, that could throw a wrench in their guidance.
  • Prior to covid, they did get a bid for all of their Latin American operations for $3.3-$3.6B in cash but the buyer backed away because of the pandemic.  The company has sold about $1B of operations in the region since, if they were able to get this price again, that would be about a 8-9x multiple on EBITDA for Peru and Mexico.
Maybe an interesting way to play this is via options?  Others investors have explained how to think about event-driven options strategies better than I can, but here it seems like an interesting setup, similar to ones I've had success with in the past.  The recent past volatility won't look like the near future where we potentially have several catalysts that could move the stock price significantly higher: 1) Walden deal closing; 2) continued share repurchases or a large tender offer; 3) sale of the remaining company.  I supplemented my common shares with some call options, specifically the December $15 strike price, these could be too short term, but ATGE expects the deal to close this quarter and that should give LAUR enough time to announce a capital return and/or another sale.

Disclosure: I own shares of LAUR and some Dec $15 calls

28 comments:

  1. Good post. Waiting for ADL to chime in saying that he's already long.

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    1. Haha, no I WAS long but I am very impatient/unfocused! Held from I think July through some time in the fall of 2020; just a tiny profit, if I recall correctly. I had only a small position, in case a quicker timeline materialized. Wasn't willing to go in properly because I am kind of dumb, and always fascinated by the next shiny thing.

      Still looking for that shiny thing! Haven't really found it, in terms of something I'd share more substantively; they're either boring core-ish positions with reinvestment/buildout/improving cap structure opportunities (US local telecoms fibering up like CNSL, LUMN, etc., probably-good black-box operators like SNFCA (though I wonder whether post-COVID world will be a setback for their major office development near Salt Lake City), RDNT, which is priced 100% above where I last felt comfortable buying) or questionable companies (AINC/NGL-C/DHC all interesting securities, but with a lot of hands due money before it gets to us, and big questions about management) or speculative trash (tiny oil cos, basket of small med device makers NURO/NEPH/DXR/NUWE/NAOV in very approx descending order of quality--that I could buy NURO at $3.40 and sell 2/3 at $28 less than a month later shows what kind of nonsense this is).

      I own everything above (and much more), and that, plus the volume of blabbing, indicates the extent to which my brains are scattered.

      Two maybe-interesting specialish situations, anyway:

      Cairn Oil, which has begun taking steps to freeze and eventually seize Indian government assets to satisfy its win in a tax case. That's being appealed, and international tribunals are wildly unpredictable and glacial-paced, but they're being aggressive, I presume, to force a settlement, and the judgment+interest is worth a lot more than the value the market currently accords Cairn, which also has some moderately interesting assets (unless you don't like O&G).

      XPER. Their ops seem decent, though I never really know how to value these super-high-GM licensing companies where the IP is obviously a wasting asset. But they have on the intermediate horizon another likely biggish settlement, plus the potential split of the company into 1 in 2022. Neither of these is a certainty, but they are at least paying down debt, buying back shares (though that mostly sterilizes other issuance, so not my fave) and paying a modest dividend.

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    2. I come for the articles, but I stay for the comments! Thanks MDC and ADL for lots of food for thought!


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    3. Don't listen to anything I say, s445203!

      That said, MN is also worth looking at, maybe. I mentioned it in the comments previously: a plain-vanilla asset manager simplifying its cap structure and building cash. It has a pristine balance sheet and is quite profitable on recent terms. Valuation was compelling earlier, less so now; my back of envelope says at 1% EV/AUM it's worth ~$14, but I stopped buying in the 7s because with no-catalyst, meh-quality situations like this you want to- be in at a valuations that's fine even if nothing happens for a few years.

      They've reinstituted a dividend and are making the right noises about buybacks and have pretty much consolidated the ownership of operating assets in the public co, which is all to the good. They've also hinted that they may finally be stanching the outflow of funds; growth in AUM has been pretty much all market-appreciation based. They are pretty generous about rewarding themselves, and have spent a lot on internal systems which may or may not be as helpful as they wish.

      There's not really any reason for a company like this to exist. They're reasonably-competent asset managers trying to be asset gatherers, with an excellent balance sheet and a future that looks a lot dimmer than the (more distant) past. But because there are so many asset managers in the same boat, they would be an attractive target IF (I theorize) they can attract some capital inflows. Everyone is in the asset-gathering game, but nobody wants to take on control premium and integration risk for a melting ice cube. But if they can show stabilization of assets (net of market moves), I think it's a whole different ballgame. Management has not offered any body language about selling, but it seems like the obvious move to me: dress up systems, drum up price (with dividend, etc.), present a sleeker org, sell out.

      Though not a perfect analog, I am sure they are cognizant of WDR's buyout last year, and are doing the same math as I: let's say they get to $25 bln AUM YE 2022 and are taken out at 2% AUM, around where WDR was. Even getting no credit for the few dollars per share of net cash, and wit further dilution, you're looking at ~$20/share. If markets keep being a tailwind, they are actually able to add meaningful assets and use cash to buy back shares, maybe they get to $30 billion AUM in, say, 2 years, and get taken out at $30.

      or maybe they keep moseying along, sharing a pittance of their profit with outsiders!

      Anyway, worth watching, maybe. Like I said, can't reco buying right now because it's outside margin of safety level and is not a moonshot stock where r/r dictates a flier. The key is, IMO, net inflows. If those start, and sustain, this rerates further than it already has, one way or another.

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    4. Any thoughts on BSIG? Similar story. Paulson 25% owner, has been winding down at a nice pace. Pro forma ~900m in net cash, making some noise about returning capital and/or selling themselves.

      One remaining asset manager, Acadian, a quant shop, with ~118b AUM. So, quite a bit more expensive (1x EV/AUM?), but some pluses: looks like it is winding down, special dividend / tender upcoming, one large opportunistic shareholder, yada yada yada.

      No position though.

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    5. Hmm, yeah very similar and worth digging into, just listened to the latest conference call, the tone sure sounds like a management team that intends to sell Acadian.

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    6. Agree. Also probably easier to sell a $1 billion EV biz than a $100 million one; it's not that much more hassle and moves the needle more for any acquirer.

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    7. PFSW looks pretty very interesting. Basically very similar to many of the deals discussed recently. Sale of major business lines with strategic alternatives on the horizon for the rest. Pro forma for sale: 6x ev/ebitda. There could be huge strategic value to remaining PFS business. Warehouse automation and fulfillment is a hot business.

      Also no position in BSIG. But would be interested to see if someone had a differentiated view.

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    8. PFSW does look interesting, I'm trying to square the guidance in the LiveArea sale deck of $184MM in revenue and 8-10% EBITDA margins for the PFS Operations business with them doing ~$26MM in LTM EBITDA at that segment. I know they're a covid beneficiary, but they're still guiding to 5-10% topline growth. What's the right number to use?

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    9. PFSW looks interesting; have same question.

      FYI to anyone reading my previous screed(s): Cairn Oil +30% 2 days after I wrote the above on Indian govt. attempt to resolve tax issue by paying them their billion dollars but not any interest due.

      TBD whether Cairn will take it but seems like they'd be crazy not to, as this is the ultimate bird in the hand.

      I thought there might be a quick resolution to this but in no way anticipated anything this quick! In any case, still think they are potentially quite undervalued as post-settlement they will have an EV not very far above zero with significant production (albeit in some hairy locales) and some potential exploration home runs.

      Of course, the cash could just give them a longer, richer slide to bankruptcy; really depends on how you feel about junior E&Ps.

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    10. I emailed PFSW's outsourced IR, probably won't get a response, but I'll revert back if I do.

      Cairn is a little too adventurous for me, but good work!

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    11. Ah, great!

      Can't fault that stance on Cairn. I swore off all gold miners but can't yet quit speculative petro. Just about the only O&G with an apparent, unadventurous path to returns I can think of is EPM (Maybe EPSN too, though I haven't done the work on it), though their recent purchase has changed their profile and bears watching (or ignoring, since there might be easier ways to make money!).

      Can't recall (maybe I'm repeating myself!) whether I've mentioned EPM, but they own non-operated, low-decline mature assets without exploration risk and tend to run modestly net cash without hedging and with a shareholder-return mandate, via dividends and buybacks. Basically doing their best to imitate an old industrial-products company in a very different field.

      Not much reason to own, unless you want O&G exposure or want to express a view on hydrocarbon prices. But a more active IR effort of late (double edged sword) and line of sight to a dividend above the current 5% (my back of the envelope gets me to ~10% with unheroic assumptions in the mid term), with a balance sheet and operations that let a person sleep.

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    12. Regarding WDR: was it really taken private at 2% EV/AUM? Quite a bit of cash and investments on the balance sheet, purchase price seems around an EV of ~$1b for $75b AUM or ~1.3%? Maybe it is a crappier investment manager though, haven't really looked in depth at either yet.

      Both Cairn and PFSW look interesting, thanks for flagging them.

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    13. You are, of course, correct, Writser; closer to 1.3 than 2. My apologies for being slapdash, which is the peril of going entirely on memory. I recalled just enough of the transaction to give a gross figure, not EV.

      Obviously, 1.3% would be great for MN too. My back-of-the-envelope valuation put MN at $14-24, and in a situation like this where it's a pure guess I like to be in at 50-60% of the low end of value range to account for uncertainty, so I'm not buying any more now. No real insight into MN vs WDR as an institution; though I know there are some sharp divisions between best and worst, and delineations on client and strategy, I think of them both as more or less middle of the pack, vanilla asset managers/advisors, roughly equivalent. I tend to miss a lot of nuance and tell myself it's not important (unlike the 30% miss in valuation above!).

      Speaking of, there are a lot of "imaginary arbs" out there these days, of deals which might not be real or might not get done:

      IVAC--strategic review; not much info.

      ITI--ditto; triggered by a stock and cash offer from REKR that at the time offered $8+ of value and at today's price would be just a bit above $4! So it maybe speaks well to ITI management that they rejected it basically out of hand.

      SMTS--ditto, with the eternally-impatient Leon Cooperman involved, which is a plus; plans to update in a few weeks.

      ADES--interesting situation where company will soon be trading around cash (on business coming to an end shortly); I feel like there's a bunch of info on it around.

      LMRK--2 bids in, plus a third bid that seems suspect to me; trading a dollar above highest bid, but $1.80 below overbid.

      CXP--strategic review triggered by an offer at $19.50 this spring; maybe they lost the bird in hand because gateway city office/retail assets and high-end repositioning plays might not be looking as attractive now as they were a few months ago. Bought a bunch of Jan 15 calls yesterday because they seemed very cheap. Company has an interesting niche.

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    14. ADES is an interesting name that I own a bit of and have traded around a bit in the past few months. Capital allocation seems somewhat decent (perhaps apart from the decision to buy the Red River plant in the first place). Under $7 the implied price of the Red River plant seems reasonably cheap compared to 1) where they bought it and 2) what some simple modelling suggests post Cabot, post price hikes. That said, I'm a bit wary to value the plant too optimistic as it seems like it is basically profitable by the grace of Cabot only.

      Also, I thought the VIC write-up was very good - not sure I have an edge compared to others looking at this name.

      LMRK I looked at a while ago - interesting situation but I know nothing about the assets and am a bit wary about some random party trying to overbid insiders. Decided that it was too difficult for me.

      My look-into-later list is getting longer and longer. Time for an early weekend now - I'm a lazy European.

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    15. 100% endorsed, especially the long weekend plan.

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    16. Thanks for the all the ideas.

      Coming back to PFSW, I received back a predictably unhelpful response from IR, but I think the LiveArea deck is "standalone" as in it includes some corporate overhead (the 8-10% EBITDA number would be including a fair amount of cuts to overhead compared to the TTM number of $18.5MM). But that's my best guess, sounds like they're shopping the segment, 3PLs are hot, GXO (the XPO spin) has done well out of the gates, this is obviously much smaller but would make for an easy tuck in, pretty fragmented market, guessing there would be buyers.

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    17. Makes sense.

      In turn, a small nugget from RHE. In response to my inquiries, CFO Ben Waites said, basically: Yup, it's game theory, RHE-A is only senior in liquidation, we're talking to Charles Frischer and hope it's not a waste of time. A somewhat hardball response, unsurprisingly.

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    18. Good to hear they're talking, but they might have missed the window to preserve some value for the common, its quickly losing its meme status.

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  2. Some marginally positive news: ATGE had quite a bit of management turnover the past few months. I missed this initially, but activists were pressuring the company to try and cancel the Walden purchase ( https://www.highereddive.com/news/activist-investors-urge-adtalem-to-pull-plug-on-walden-u-purchase/593775/ ) .

    However, according to todays PR ( https://investors.adtalem.com/press-releases/press-releases-details/2021/Adtalem-Announces-CEO-Transition/default.aspx ) the new CEO "spearheaded the acquisition of Walden University and is driving the integration planning process that will allow us a running start when the acquisition is completed by the end of 1QFY22.". So, looks like they are not trying to walk. Also, the timeline is still Q3 2021. Of course it's just a press release ..

    I'm also pondering a bit how to interpret the July 27 purchase agreement amendment. Looks like both parties agreed that the DOE response (even though it was only initial) was good enough to prevent either party from terminating the agreement. Again suggesting that both parties are committed, why would ATGE voluntarily commit to that if they try to squeeze out? And as a quid pro quo Laureate provided additional indemnification? Or am I misinterpreting this.

    Finally, looks like CACREP will notify ATGE / LAUR on August, 25 ( https://www.cacrep.org/organization/walden-university/ ). Perhaps an important date.

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  3. And from the LAUR cc:

    "We are still very committed to returning excess capital to our shareholders. We have -- we had a strong cash position now, and we will be even in a stronger position at the close of the Walden transaction. And we are working on ways to return capital in the most tax-efficient manner for our shareholders, and we will provide more details on that after the closing of the Walden transaction."

    "Bill, there is just some -- what I would characterize as mainly administrative matters at standing to satisfy the CPs for closing and both Walden and Laureate are working collaboratively and expeditiously towards a successful closing in the near future. I can't be more specific on that, but certainly, we have a high confidence that that this is a third quarter item."

    I'm honestly quite puzzled by the way this is priced. Is the market skeptical about the Walden transaction closing? All the circumstantial evidence I see suggests that this will close quickly.

    Is the market skeptical about the return of capital? I also don't see any problems there: given PE ownership, repeated comments by management and the size of the pro forma cash balance I'm pretty sure a lot of cash will be coming our way one way or another when the Walden deal closes.

    So I guess that leaves the last option: the market is very skeptical about remainco. Which is probably the case. But with an EV of ~$1.3b, 2021 guidance of 210m and 2022 guidance of 280m this seems quite cheap on a standalone basis and even cheaper if they wind down, which probably is the end game.

    Confusing. I mean it is either quite a bit mispriced or I completely misjudge remainco.

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    1. I agree its confusing, I think it's a combination of things: 1) doesn't screen well, its not screening at 4x EBITDA; 2) the for-profit education sector still has a stink on it for US investors; 3) its not a true risk arb that would get picked up by bigger funds, has that uncertainty to it

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    2. A major portion of remainco EBITDA is in Peru. They just elected a socialist (and an actual one, not one of those American "socialized healthcare is socialism"). Maybe he wants to imitate China in the for profit education sector. At the very least it might be tougher to find a buyer and might compress multiples? And might also take longer because potential buyers might want to hold out and see how much of a socialist Castillo really is. And if this is going to be a second Venezuela.

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    3. Yea, you're right, pointed that out in the write-up as well, the stock sort of seems to already incorporate that in the price. Even if it takes some time to get Peru and/or Mexico sold, the Walden sale just closed yesterday, there's like an increased buyback, tender or special dividend coming shortly, still continue to think its an attractive situation in the near term.

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  4. EBITDA is fine but what is the profit situation?

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    1. Can't tell if you're just trolling, but obviously there's a lot of noise in their financial statements right now, I'll let you make your own adjustments to determine net profit/loss. But on the larger question of EBITDA here, it's clear they're in the middle of a process and management is probably using that $280MM in EBITDA as a valuation metric with bidders. We can all agree that EBITDA isn't owners earnings, but its what is typically used in deals like these, so I'm not advocating for EBITDA, just the world we live in.

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  5. RevelationOnVacationAugust 9, 2021 at 9:58 PM

    Hey MDC, looking at $GAU; would love your input. Looks to be trading below book and producing cash. Not sure if I am missing something.

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    1. Sorry, I'm probably the wrong person to ask about a gold miner, never really look at them.

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