Old pals in twin buyouts

The Baltimore Sun

The two Baltimore companies born through the breakup of Sylvan Learning Systems Inc. have shared plenty of things over the years, including office space, human resources functions and even executives who serve on each other's board of directors.

Now, Laureate Education Inc. and Educate Inc. have agreed to take their publicly traded companies private in management-led buyouts. The companies have chief executives who have been close friends since attending the Gilman School and who bought and ran Sylvan together before deciding to split it up in 2003.

In two deals announced late Sunday and early yesterday, executives for Laureate and Educate say converting to private ownership is the best move for shareholders. And as close as both companies have remained since the Sylvan split, Laureate and Educate executives say they are acting separately in taking their businesses private.

The Laureate deal was announced at 9.30 p.m. Sunday, only to be followed by Educate's announcement at 7 a.m. yesterday.

"I understand the coincidence that these transactions came to a head at the same time," said Kevin E. Shaffer, Educate's chief financial officer. "It makes for an odd coincidence, but it's really just that."

Added Chris Symanoskie, Laureate's director of investor relations and corporate communications: "Laureate is operating on its own timetable and continues to pursue its own strategic plan."

Educate, best known for its Sylvan tutoring centers, announced yesterday that it will be acquired by management, including Chief Executive Officer R. Christopher Hoehn-Saric, and other investors. That group has offered $8 per share for the company. Including assumed debt, Educate's transaction is worth $535 million, the company said.

The news came a few hours after Laureate, operator of online and foreign universities, agreed to be bought by a group of investors, led by Chief Executive Officer Douglas L. Becker. That deal is worth $3.8 billion, including debt.

Hoehn-Saric declined to comment yesterday. Laureate executives said Becker was not available to comment.

Educate stock, which had factored in the possibility of a buyout since company executives announced their intentions in September, rose 20 cents to $7.81 yesterday.

Laureate shares rose nearly 12 percent, or $6.39, to close at $60.80. The Laureate deal took Wall Street by surprise.

Company executives did not publicly disclose they were considering a buyout. Becker approached his board of directors with an offer in September, Laureate said Sunday.

If approved by investors and regulators, Laureate shareholders would receive $60.50 per share. The offer represents an 11 percent premium over the price of Laureate's shares as of Friday, which closed at $54.41. Laureate has 51.4 million outstanding shares.

For the first nine months of 2006, the company reported a profit of $49.3 million on revenue of $799 million.

The transaction includes a so-called breakup fee in which Laureate would have to pay the buying group up to $110 million if the transaction falls through, according to documents filed yesterday with the Securities and Exchange Commission.

While competing proposals are possible, Jeffrey M. Silber, an analyst at BMO Capital Markets, said the chances are slim considering Becker's involvement with the buying group. A competing proposal would result in Laureate losing a "tremendous amount of value without him there," Silber said.

In contrast, Educate's $8 per share purchase price includes a 5 percent premium over Friday's $7.61 close.

In September, when Educate announced that it had received the buyout proposal, the offer carried a 13 percent premium. The company has about 43 million outstanding shares. The breakup fee on that deal is $16 million.

Besides Hoehn-Saric, the buyout offer came from President and Chief Operating Officer Peter J. Cohen; Christopher J. Paucek, president of Educate Products, and Sterling Capital Partners. Also, some partners and co-investors of Sterling, including Citigroup Private Equity, are part of the group.

Educate's board of directors unanimously agreed to the deal Sunday, according to SEC documents.

Investors of Laureate's deal also include Citigroup Private Equity and Sterling Capital. Others include Kohlberg Kravis Roberts & Co. and S.A.C. Capital Management.

Sterling Capital Partners is the buyout arm of private equity group Sterling Partners of Baltimore. Hoehn-Saric and Becker co-founded Sterling Partners. Becker's brother, Eric D. Becker, is a founder and senior managing director at Sterling Partners.

In each of the buyout deals, Hoehn-Saric and Becker - who each sit on one another's board of directors - abstained from voting on either proposal, according to SEC documents filed by Educate and interviews with a Laureate spokesman.

The business partnership between Hoehn-Saric and Becker goes back nearly 25 years when the two students met while working after school selling computers at a Timonium outlet.

Hoehn-Saric and Becker bought then-struggling Sylvan from the day-care chain KinderCare for $8 million in 1993. The two were co-chief executive officers of Sylvan for several years.

In 2003, Sylvan sold its pre-kindergarten-through-12th grade tutoring business to focus on higher education online and abroad and became Laureate Education.

The tutoring business was sold to investment fund Apollo Management LP and became Educate. Apollo Management, which is Educate's largest shareholder with nearly 53 percent of its stock, has agreed to vote its shares in favor of the transaction, the company said.

Educate has been struggling of late with its tutoring business while it continued to invest in its Hooked on Phonics product lines. For the first nine months of 2006, Educate had a loss of $870,000 on revenue of $277 million.

After the Sylvan split, the two companies each housed their headquarters in the same building on Fleet Street. Educate subleased its corporate offices from Laureate for $2.4 million in 2005, according to SEC filings.

Under a three-year agreement signed in 2003, Educate provided Laureate payroll, accounting and other functions. Laureate paid Educate $3.7 million for those services in 2005, according to SEC documents. As part of the agreement, Laureate provided certain real estate, tax and treasury services to Educate, which cane to $700,000 that same year.

That agreement, which expired June 30, 2006, was extended through the end of this year but covers less services, said Shaffer, of Educate. In addition, Laureate said it is expected to move its corporate offices to South Exeter Street in the spring.

Executives for both companies said that despite the sharing of those functions, Educate and Laureate are working to lessen those arrangements as each business evolves.

Both buyouts reflect a larger trend in the market where private equity firms are paying a premium to snap up public companies. For instance, Clear Channel Communications Inc., the largest U.S. radio broadcaster, agreed last year to be taken private in a deal that values the company at $19 billion.

Corporate governance experts and shareholder advocates say investors should pay extra attention to buyout offers led by management. "We always counsel shareholders to apply a greater degree of skepticism to take companies private initiated by internal management teams," said Chris Young, director of mergers and acquisition research at Institutional Shareholders Services, a Rockville firm that advises clients on proxy issues. "Do they know something the public markets don't know?"

hanah.cho@baltsun.com

At a glance

Two private-equity deals in the for-profit education sector were made for Baltimore companies this week. If approved, Educate Inc. and Laureate Education Inc. would become private.

Snapshots of the deals:

Educate Inc.

Management offered $8 a share for the company. Including assumed debt, the transaction is worth $535 million.

Operates tutoring business and owns Hooked on Phonics; more than 1,000 franchise and corporate-owned Sylvan tutoring centers.

2,300 full-time employees and 6,450 part-time workers in the United States and Canada. More than 100 are employed in Baltimore.

Laureate Education Inc.

Management offered $60.50 a share in a $3.8 billion deal, which would make it the largest buyout in the for-profit education sector.

Operator of online and foreign, campus-based universities; 240,000 students online and at about 58 campuses in Latin America and Europe.

Employs 25,000 employees across the globe, including 450 people in Baltimore.

[Source: Educate, Laureate Education and interviews]

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