Sylvan selling tutoring business


Sylvan Learning Systems Inc., the Baltimore company that became a household name for its franchised approach to tutoring children, has decided to get out of that business.

The company announced last night that it will sell its familiar tutoring centers and related businesses to New York-based investment fund Apollo Management LP for cash, stock and other holdings worth $275 million to $300 million.

Sylvan, in turn, will focus entirely on higher education, a business it entered in 1999 when it began buying small colleges in other countries and one that Douglas L. Becker, the company's chairman and chief executive officer, ultimately concluded has greater long-term potential for growth than tutoring grade-school children in the United States.

Becker, who will have to drop the Sylvan name from his company during the next year, described the new entity that will operate colleges overseas and on the Internet as "another once-in-a-lifetime opportunity."

He might not have arrived at this juncture had the tutoring business not become mired in an unprofitable venture investment business that soured investors on Sylvan's stock.

Apollo will pay Sylvan $117 million in cash and $55 million in a note to be paid over six years, and return 3.8 million Sylvan shares it owns, valued at $60 million. Apollo will also turn over to Becker's new company its interest in the Sylvan Ventures fund, valued at $45 million.

Becker plans to sell several of the companies supported by ventures, including resume verification and a Web site aimed at mothers, and retain only those that provide college degrees.

Apollo will retain about 1.2 million shares in the higher-education company, whose stock market ticker symbol, SLVN, will also change in the next year.

"This is the hardest decision I've ever made," Becker said yesterday of reconstructing a company that he and a friend, R. Christopher Hoehn-Saric, bought when they were a few years out of high school with money they had earned from an identification-card invention.

They led Sylvan as it became the nation's top tutoring company during the past decade and one of the largest and most recognized employers in the Baltimore region.

The decision to remake the company culminated months of soul-searching by Becker, Hoehn-Saric and the company's board of directors during a difficult year. Even though President Bush's education reform program portends a new emphasis on private tutoring help for children, Sylvan's stock price languishes below those of many other education companies.

Stock price down

It closed yesterday down 53 cents at $11.43 on the Nasdaq stock market, nearer its low for the past 52 weeks of $9.46 than to its high of $29.15. Sylvan's partnership with Apollo Management and others in a $500 million pool of venture capital to invest in high-tech education start-ups, which began three years ago, has wiped out more than one-third of Sylvan's profits over the past two years.

Although parents who enroll their children at Sylvan centers might not notice much of a change, the complex transaction, signed last night but not complete, has major implications for Sylvan.

In essence, it will be broken into two companies. The tutoring portion will be bought by Apollo, a private fund, and by Sylvan executives who will go to work for Apollo, so it will no longer operate as a publicly traded company with shares on the stock market.

Although it will continue to operate the Sylvan-brand tutoring centers, its corporate name will become Educate Inc.

The renamed higher-education portion, to be led by Becker, will remain a publicly traded company operating colleges, not tutoring children.

Both companies intend to keep their headquarters in Baltimore.

"The facts leap up and beat you over the head," Becker said late yesterday, hours before getting on a plane to Phoenix to present his company's new vision to a convention of analysts today.

Sylvan employed two outside consultants last fall to produce five-year projections for growth, partly as a way to help resolve outside confusion about the company and its money-losing venture unit, which had become the proverbial dog that kept eating Sylvan's homework.

Startling conclusion

The consultants reached a startling conclusion: The company's newer, less-known business was the one it should remain in. The older, better-known, core business might be better sold.

In 1999, when Sylvan bought its first college, Universidad Europea de Madrid in Spain, the tutoring centers generated 65 percent of the company's total revenue and 74 percent of its profit, adjusted for unusual charges.

The company expects a reversal this year, with the six universities and online colleges producing 63 percent of the revenue and 60 percent of the profit.

Enrollment in the colleges - in Spain, Mexico, Chile, France, Switzerland and, soon, India - has grown tenfold, to about 60,000 this year from 6,200 in 1998. Enrollment in Sylvan's wholly online degree programs, Canter, Walden University and National Technological University, has grown to about 16,000 from 3,500 in 1997.

Becker and his executives concluded that the need for college opportunities in other countries with growing middle classes was exceeding their original expectations. Meanwhile, growth in the U.S. tutoring business had flattened, in spite of increased attention on student performance and college competition.

Critics contend that Sylvan's profit and revenue growth in colleges can't continue unless it keeps buying new ones, but Becker thinks the business has shown enormous potential in the schools Sylvan owns. It plans to add colleges in one or two more countries, however, he said.

Because college students sign on for four years, compared with several months for tutoring clients, Sylvan expects profits to grow 30 percent to 40 percent a year at its colleges, double or triple the growth it expects in tutoring.

End of partnership

Hoehn-Saric will lead the tutoring company for Apollo, effectively ending the business partnership he began with Becker almost 20 years ago when the two Gilman students met while working after school selling computers at a Timonium outlet.

That friendship led to a business partnership with Becker's older brother and another friend that proved so lucrative that Douglas Becker decided to skip college and Hoehn-Saric dropped out of the Johns Hopkins University. The two bought then-struggling Sylvan from the day-care chain KinderCare for $8 million in 1993.

"I have mixed emotions because we've been long-term partners," said Hoehn-Saric, who will remain on the board of directors of the company Becker will lead.

The two were co-chief executive officers of Sylvan's tutoring business for years before Hoehn-Saric was chosen to head Sylvan Ventures. Hoehn-Saric had earlier been credited with building up Prometric, a computer-testing business Sylvan owned that brought the parent $775 million in a sale in 2000.

Sylvan used that money to begin buying colleges and to start the venture fund with Apollo Management. Founded by investment banker Leon Black, the $3.8-billion Apollo fund also owns large stakes in other companies, including Vail, Colo., ski resorts, road-salt suppliers and the AMC Entertainment movie theater chain.

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