An Equity Strategies analysis of recent transactions including an up to date exit valuation of MPW, a review of sector profitability and an assessment of how changes to student financing and the student quota system will impact the market for Sixth Form education.
In July 2012 US based Apollo Group announced it had sold Mander Portman Woodward (“MPW”) to Levine Leichtman Capital Partners Inc. (“Levine Leichtman”) for £54.8m following a competitive auction process. Just two months later Sovereign Capital acquired three independent sixth form colleges in Central London (now known as the Astrum Education Group) from Mr. Hugh Templeton and other shareholders for a rumoured enterprise value of £30m. The sale included the respected Duff Miller College, located only a few hundred yards from MPW in South Kensington.
MPW is one of the UK’s best known independent for-profit sixth form college groups with colleges in London, Cambridge and Birmingham. MPW offers full-time GCSE courses, A-level courses and intensive A-level and GSCE retake and revision courses.
MPW recorded operating profits of £5.2m (2011: £4.13m) in the twelve months ending August 2012 on revenues of £15.7m (2011: £14.1m). Operating margins hit 32.1% in 2012 up from 29.3% in the previous year, one of the highest in the sector. The number of full-time students increased 3.7% to 842.
The £54.8m purchase price represented 10.5x EBIT (earnings before interest and tax) and 14.3x reported post-tax profits in 2012. In addition, the Company paid a pre-sale dividend to shareholders of £6.8m.
MPW operates its college in London from adjoining period properties in South Kensington. The three Astrum colleges sold by Mr Templeton, Bahamas registered Winsland Enterprises Ltd (which owned a third of each college) and other shareholders, educate around 750 students aged from 16 to 18 years old. In addition to Duff Miller, the colleges acquired by Sovereign Capital were Lansdowne College in Bayswater and Chelsea Independent College in Fulham.
Comparisons with the MPW deal are made difficult as the purchase price has not been confirmed and the accounts filed with Companies House for the three colleges are in abbreviated form. The aggregate net assets of the three colleges were approximately £3.1m in 2011, which included cash of £3.2m. We understand the three colleges did not attract as rich an exit multiple as MPW, not least because the latter is very profitable and has very modern facilities.
Both private equity firms intend to expand the number of colleges and the range of programmes being offered. Michael Needley, a Partner at Sovereign Capital said;
“There are many opportunities for growth which include: establishing new schools across the country, expanding into primary and secondary provision and serving the international pupil market both in the UK and abroad. We plan to build the group through organic and acquisitive growth”.
Whereas the acquisition of MPW represents Levine Leichtman’s first education investment, indeed its first UK deal, Sovereign Capital has made twenty acquisitions in the education and training space since 2002, investing an aggregate of £230m employing a classic buy and build model.
The acquisition of the three London colleges represents a return to the Sixth Form college market for Sovereign Capital which previously owned Alpha Plus, which was sold to DV4, a fund managed by Delancey, a specialist property investment and advisory company for £111m in 2008. Alpha Plus operates the Davies Laing & Dick colleges located in London, Cambridge, Manchester and Birmingham plus fifteen independent schools.
Sovereign Capital’s other education businesses include World Class Learning Schools (“WCL Group” and also known as British Schools of America) with thirteen schools in the USA, two in Qatar and one in Madrid, Spain. The business which was acquired in 2007 for approximately £37m generated operating profits of £2m on revenues of £42m in 2011. Sovereign Capital is currently in the process of selling WCL Group.
Equity Strategies’ Analysis of Profitability
Equity Strategies has reviewed the accounts of many of the leading independently owned Schools and Sixth Form colleges. We have only used data where we could obtain complete financial information for years ending either 2011 or 2012. Our analysis shows the weighted average operating profit margin (EBIT) of our sample was 9.8% and the weighted pre-tax return on total assets (ROA) was 7.6%. Many owners have chosen to borrow, in some cases very heavily, against freehold premises. This has had the effect of significantly boosting equity returns, as measured by return on equity (shareholders’ funds). The weighted average pre-tax return on equity in our sample was 14.1% p.a.
Generally our analysis showed Sixth Form colleges to be more profitable than their private schools counterparts. The top four Sixth Form colleges listed in the table below were amongst the most profitable private school operators as measured by operating profit margin with all producing operating margins in excess of 15%. The following table is a non-exhaustive list of sixth form college operators we sampled and where we were able to obtain adequate financial data. Our survey shows MPW to be one of the most profitable school/college operators in the UK market.
The weighted average operating margin of this group was 12.6% and the weighted average return on total assets was 9.4%. Weighted average pre-tax returns on equity were significantly higher at 24.1% than the broader sample of private schools.
The possible impact of the changes to student financing
MPW’s impressive growth in recent years partly explains buyer interest in this part of the market. Revenues at MPW have almost doubled since 2006 and may have benefited by changes to student financing in 2012. The increase in tuition fees for students in 2012/13 led to much higher demand for university entry in 2011. Students who failed to achieve the required grades, even by modest margins, often found themselves without a place at their preferred universities. This boosted demand for colleges such as MPW, which specialise in A-level retakes, as students from more affluent homes took the opportunity provided by their “enforced gap year” to improve their grades. The end of grade inflation in A-level results in 2012, which saw fewer A* and A grades being awarded, may also have boosted demand for re-takes courses in 2012/13 as more students were rejected by their first and second choice universities than in previous years.
Levine Leichtman and Sovereign Capital must be hoping these developments are not a one off phenomena and that higher student fees encourage even more demand for places at the top universities and for courses offering the best employment prospects. Historically, supply side constraints caused by the university quota system and a reluctance to rapidly expand popular courses and scrap unpopular ones has fuelled demand for top quality A-level tuition.
The possible impact of changes to the University Quota System
The Sixth Form college market could be held back, however, by the reforms introduced by the Coalition to allow universities to expand to take on as many UK students from 2012 as they wish who achieved grades of AAB or higher at A-level (falling to ABB from 2013). This development should inject greater competition into the university sector and remove many of the supply side constraints. Early evidence suggests this is happening. Bristol University and University College London both offered more places in 2012 whilst Exeter, Southampton, Sheffield and Nottingham offered, in some cases, unlimited places in clearing to students with AAB grades.
Although, some commentators believe these reforms may have only a limited impact on the most selective universities, many of which will continue to recruit students with the highest grades, in our view, the temptation to boost university revenues and gain from the benefits of greater economies of scale will see the top institutions grabbing a larger share of the market from those in the middle.
One positive factor for Sixth Form colleges is the new system may make it more difficult for universities to accept students who just miss out on their grades. Andrea Robertson, director of customer operations for the UCAS, speaking to the Guardian at the time this year A-level results were announced, speculated;
"In 2012, the new student number control arrangements mean that if the institution chooses to accept an applicant who achieves ABB against an offer of AAB then the individual counts towards the institution's allocation of publicly funded places – rather than being considered to be AAB+ or equivalent and therefore uncontrolled in terms of student numbers”. "These arrangements and the redistribution of funded places mean that for some courses there is an increased likelihood that some institutions will not be able to accept 'near miss' applicants when in previous years they might have been able to."
Evidence from Southampton University and elsewhere suggests she may have been correct. Southampton said it had to turn away “large numbers of students” with lower grades which it might otherwise have taken. Dropping the minimum offer a top university can make to ABB from 2013 should see this problem go away for students seeking places at the top universities but students applying to universities further down the “pecking order” may be affected.
So if there is a drop in demand from the best performing students can private Sixth Form colleges make up falling numbers by attracting students who previously had little prospect of getting into one of the top universities but now stand a chance if they can secure at least ABB grades? In part, the success of this strategy will depend on there being little or no correlation between A-level performance and parental disposable income. Alternatively, Sixth Form colleges in London may need to compensate for any reduction in the number of student coming from the UK by offering more places to the sons and daughters of wealthy overseas families who have chosen to reside in London in recent years.
Another adverse factor which may impact the market is the Coalitions desire to increase the number of pupils from state schools attending elite universities. The Government’s Office for Fair Access has already reached agreements with eleven Russell Group universities to boost state school admissions which may come at the expense of privately educated pupils with better grades unless the number of places at elite universities expands accordingly. Positive discrimination in favour of state school students may encourage parents to switch their children to better performing state schools at the age of 11 or 16, particularly if academies and free schools deliver on improving standards.
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