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Basic math

2 May 2016 By

The owners of Apollo Education may be about to flunk buyouts 101. The private-equity group bidding for the University of Phoenix parent increased its offer 5 percent, to $1.14 billion. That’s even more generous, considering the for-profit college firm and its rivals face regulatory crackdowns and dimming financial prospects. With a vote on the deal slated for Friday, investors still grubbing for a higher price could end up looking like dunces.

Major shareholders like investment manager Schroders objected to the original $1.1 billion offer as too low. That prompted a group led by Vistria and Apollo Global Management – which isn’t related to Apollo Education – to sweeten its offer. The increase may be modest, but the new bid nonetheless represents a 44 percent premium over the company’s undisturbed share price just before the original offer was announced on Feb. 8.

Some investors may have been impressed, as Apollo Education’s share value was up about 8 percent midday on Monday from its Friday close. Yet the stock was still trading roughly 16 percent below the new $10-a-share offer. The spread is a bit narrower than it was last week, but still more than the 9 percent gap the day the initial offer was announced. Many shareholders, it seems, remain skeptical.

Monday’s stock price was about halfway between its undisturbed level in early February and the latest offer amount. So market trading implies that the odds of the deal being completed are, at the moment, about even.

Apollo Education announced on Monday a downward revision to its forecast performance for fiscal years 2016 and 2017. It now expects new student enrollment at its various colleges to reach only about 80,000 in 2016 rather than 88,000, and its revenue to be $2.1 billion rather $2.2 billion. Since 2010, when the Obama administration began imposing tighter regulation, new enrollment has declined nearly 80 percent and revenue almost 60 percent.

There are other headwinds as well, including serious competition from non-profit colleges’ push into online courses. Add it all up, and this is one deal Apollo Education shareholders probably can’t afford to refuse.


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