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