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Grade deflation

27 April 2016 By

The proposed buyout of Apollo Education makes the grade – but barely. A $1.1 billion offer for the U.S. for-profit college chain from a group led by the unrelated Apollo Global Management and Vistria is a big comedown for a firm worth $14 billion in 2009. Three of its six largest shareholders plan to reject the bid as too low. They probably won’t get a better deal, though, given legal and regulatory hurdles.

President Barack Obama’s crackdown on for-profit universities in general has taken its toll. Apollo Education’s University of Phoenix, as well as peers like ITT and defunct Corinthian Colleges, have struggled with accusations of charging premium prices for degrees of dubious value. Heightened scrutiny has squeezed the schools further, prompting a 54 percent decrease in average enrollment at Apollo Education since 2010 and a nearly $2.9 billion drop in its value from 2015.

Shareholders like investment manager Schroders still think the offer, which values the group at 1.6 times earnings and represents a 44 percent premium to its share price before talks were announced, is too low. That’s hard to square with growing regulatory pressure.

A new rule bars for-profit schools from getting more than 90 percent of their revenue from federal aid to students – a major source of revenue in the past. And the non-profit education sector’s push into online courses has increased the competitive threat. What’s more, the White House’s plan to make community colleges free poses a long-term economic challenge for the pricey likes of the University of Phoenix.

The investor group’s close ties with the Obama administration could prove useful. Vistria founder Marty Nesbitt is chairman of the Obama Foundation and a friend of the president. Vistria Chief Operating Officer Tony Miller is a former deputy secretary of the Department of Education and would become the chief executive of the group if the deal goes through.

Apollo Education stock was trading on Wednesday well below the roughly $9.50-a-share on offer, suggesting investors are skeptical of the transaction. The buyout looks, however, like their best bet for seeing the University of Phoenix’s owner rise from the ashes.


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