Laureate becomes public company again, raising $490 million

Laureate becomes public company again, raising $490 million

Laureate Education, a Baltimore-based company that owns and operates universities around the world, became a public company again on Wednesday, raising about $490 million in its initial public offering.

The firm sold 35 million shares to investors at a price of $14 each, moving forward with plans that had been in the works since the fall of 2015. The stock fetched a lower price than the $17 to $20 the firm had hoped for and slumped further during its first day of trading on the Nasdaq exchange, closing at $13.25.

The offer pricing and initial activity disappointed CEO Douglas L. Becker, but he said he was pleased the firm had been able to raise as much as it did.

The firm registered to go public with the Securities and Exchange Commission in October 2015, but the plans were postponed amid turbulent financial markets and regulator scrutiny. As the market surged following President Donald J. Trump's election, the firm dusted off those plans.

In the final weeks, Laureate added shares to the offering to ensure that it raised enough, and one of its current backers, the New York private equity firm Kohlberg Kravis Roberts & Co., agreed to buy up to $50 million of the newly issued shares.

"I certainly was disappointed in the stock price, but I was very happy that we had enough demand from very high-quality investors, not only to get the IPO done but to increase the number of shares to achieve our target," Becker said.

The lower price signals weak demand from investors, likely concerned by the risks associated with both the company and for-profit education, analysts said. The company carries a hefty debt load of more than $4.2 billion, which likely gave investors pause, given the firm's minimal revenue growth.

"The issue with the company all along has been valuation," said Jay Ritter, a professor of finance at the University of Florida's Warrington College of Business. "Just how much is it worth?"

Headquartered in Harbor East, Laureate operates 71 institutions in 25 countries. The firm employs more than 67,000 people globally and about 1,130 at its offices in Baltimore and Columbia.

Proceeds from the stock offering will go toward reducing some of that debt, Becker said. Taking the company public is also the first step to converting some of its debt into stock, which would raise millions more.

"The IPO itself is just the tip of the iceberg in terms of the capital that was raised," he said.

If the firm succeeds at reducing its debt load and can produce more growth, investors could see the stock's value rise over the next three to five years, said Jim Kyung-Soo Liew, an assistant professor of finance at the Johns Hopkins Carey Business School.

"This is not an investment for the weak-stomached investor," he said. But "demand, I think, is there for education. … You want to buy when everybody else is fearful."

The company also is looking to grow, though not at its previous pace, Becker said. In the offering prospectus, the firm said it is eyeing the Asian market and hopes to increase participation in online programs.

"Demand for what we do is strong and growing all over the world," he said.

Laureate traces its roots to the test prep and tutoring company Sylvan Education Systems. The firm purchased its first university overseas in 1999.

A group of investors, including KKR, took the company private in 2007 in a $3.8 billion leveraged buyout.

The deal allowed Laureate to expand aggressively overseas, as it aimed to meet the rising demand for higher education from the world's growing middle class.

More than 95 percent of its 1 million-plus students are international, the majority of them in Latin America.

Becker played down the political risks facing for-profit education around the world, saying the company's scale allows it to hedge against problems in individual countries. Most of its students pay out of pocket, rather than relying on government loans.

Becker, who grew up in Maryland and made his first million as a teenager with a new medical record device, also emphasized the firm's status as a public benefit corporation and said reputation — the company's universities include top-ranked institutions in some countries — matters.

"I think regulators have a very high appreciation for a company that puts students first and gets results," he said.

However, Laureate does face several student lawsuits and ongoing regulatory investigations.

"You can't have a million students and be in 25 countries and do this for 25 years … and not have things come up," he said.

Laureate made about $330 million in the first nine months of 2016, according to SEC filings. But the firm had logged losses every year since at least 2012, losing millions to debt payments and currency fluctuations.

Don Jones, a freelance writer for the finance website Seeking Alpha, criticized the IPO before it came to market.

Most companies seeking to go public have a good "growth story," he said. But in this case, the firm needed to raise money and give its private equity backers a chance to exit.

Laureate Education is controlled by the entity that took it private in 2007, Wengen Alberta Limited Partnership, which includes Becker, KKR and other private equity firms.

"The jury's out," said Jones, adding, "It's obviously a success to go out at all in a … volatile environment."

The stock sale does little to dilute voting control of the company, which remains in the hands of its original backers.

Wengen continues to control most of the common stock and voting power after the offering.

That kind of structure has become more common, with companies such as Google parent Alphabet, Facebook and Under Armour employing it, though some investors, including players such as T. Rowe Price, have voiced concerns.

It may have affected the stock price, said Kathleen Smith, a principal at Renaissance Capital, a manager of IPO-focused exchange traded funds.

"That's not a deal-breaker, and we know there's a lot of companies that do this, but investors don't like it," she said. "It adds some additional risk knowing that the company is really driven by and controlled by these buyout investors who are really not long-term holders. They're now getting into liquidation mode."

nsherman@baltsun.com

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