Sylvan Learning Systems Inc., the Baltimore-based provider of educational services, announced yesterday that it will spin off its computerized testing service company in order to focus on its tutoring business.
Sylvan said it will sell up to 20 percent of Prometric Inc., which offers more than 2,400 kinds of tests to more than 170 clients, by early 2000. The remaining stake of Prometric will be distributed to Sylvan shareholders by next fall if the Internal Revenue Service rules that such a distribution is tax-free and no adverse business or market conditions exist for Sylvan or its stockholders.
"Sylvan has evolved over the years into a much bigger and more complex company than we originally envisioned," said Douglas L. Becker, president and co-CEO of Sylvan. "As we look at the company today, we realize that some parts of our business look very different from others. We felt that we would allow it better focus and us better focus if we set Prometric Inc. up as its own public company."
Analysts and investors find Sylvan difficult to evaluate because it does so many different things.
"It's an encouraging first step," said David A. Nadel, an analyst with Bear, Stearns in New York, who downgraded his rating on the stock to "neutral" in July 1998 because he considered the company vulnerable to competition in the testing arena. "It's positive because it shows that Sylvan may be thinking of a fundamental restructuring of its business. But it doesn't solve the fundamental challenge facing Sylvan stock -- the sheer complexity of operating nine unrelated businesses.
"Investors want Sylvan to streamline its strategy by focusing on its best businesses."
The announcement comes as Sylvan's stock price is trading near its 52-week low of $15.25. As a company that has achieved most of its growth by acquiring other companies, Sylvan needs to boost its stock price to give it more leverage to make other acquisitions, analysts say.
Sylvan's shares gained 12.5 cents yesterday to close at $16.
"At least Sylvan is holding its own while the rest of the market is down," said Scott L. Soffen, an analyst with Legg Mason Wood Walker in Baltimore.
Legg Mason is projecting a target price of $41 a share in 12 to 18 months for the combined Sylvan and Prometric, Soffen said.
Prometric represented about 40 percent of Sylvan's business in 1998 -- about $180 million of the company's total $440.3 million in revenue. Prometric has more than 2,900 testing centers in 141 countries.
The testing business is growing quickly. More of it is being done in kindergarten through eighth grade for accountability reasons, and for certifications as people jump to new jobs, according to Soffen. The greatest growth is in computer-based testing, Prometric's niche.
Soffen said the Prometric spinoff is a strategic move to heighten awareness and interest in the company. "It's been hidden within Sylvan and is not as appreciated by Wall Street as it should be," he said.
The Internal Revenue Service is expected to rule in 45 to 60 days on whether the distribution of Sylvan's Prometric stake is a tax-free transaction.
Pub Date: 9/25/99