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How to make money on liquidation company. Done by our student

How our student made an analysis on a stock and made about 50% in 6 months period

Private higher education company Laureate Education is in the process of disposing of all of its operating businesses. The strategic review was launched in Jan’20 and since then, the company has already sold almost half of its operations and paid down a large part of the debt (currently in net cash position). Management is committed to unlocking the value of the remaining assets – operations in Peru and Mexico as well as closing the currently pending sale of Walden University ($1.48bn). Walden sale is expected to be completed in Q3’21 after which LAUR will be standing on $1.5bn+ of net cash. As indicated by management numerous times already, a large tender offer/buybacks are expected after the sale closes. It will be hard to return such amounts of capital through open market purchases and therefore I believe we will see a tender announced shortly.

From the 1Q21 Call:

We continued to believe that returning capital to shareholders through stock buyback is very accretive use of capital for our investors, given the significant discount of our stock price versus the intrinsic value of the individual institutions in our portfolio.

4Q20 Call:

Our intent is to return large amounts of excess cash to our shareholders in a tax efficient manner during 2021, following the completion of the pending divestitures.

3Q20 Call:

The most tax efficient manner to return capital to shareholder is in the form of open market purchases, so share buyback like the program we’ve just announced as well as other means such as a tender offer. So at this point in time, we are not thinking of distributing cash or excess cash to shareholders in the form of dividends, obviously that may change, but our priority is really to do it in the most tax efficient manner.

At the current LAUR share price, the remaining Peru (the crown jewel of LAUR) and Mexico operations are dirt cheap – trading at a mere 3.6x TTM EBITDA, whereas management previously said that it expects to sell these assets for similar multiple as the recently sold Brazilian assets (10x TTM EBITDA). Applying 10x multiple on $215m in TTM EBITDA for the Peru business and a more conservative 6x on the $110m in TTM EBITDA for Mexican business, I arrive at operating business value of $2.8bn, which together with a $1.5bn net cash translates into equity valuation of $4.3bn ($21.94/share) – 50% upside the current market cap of $2.86bn ($14.6/share).

I don’t think it would be out of the realm of possibility to see someone make an offer for Peru & Mexico as from the proxy related to the recent Brazil operations sale there was a party (“Party C”) interested in buying ALL the Latam Assets for $3.5bn, further bolstering the conservativeness of my valuation for the remaining businesses.

Management is currently waiting for the Peru and Mexican operations to normalize post-COVID, however, are open for the inbound interest (Q4’20 Call):

That said, the decision to focus on a regional operating model in Mexico and Peru does not preclude further engagement with potential buyers for these businesses as we are committed to pursue the best strategy to optimize shareholder value.

The margin of safety is significant – even if the Peru & Mexico business are not sold immediately, they are trading at a very low implied valuation. Corporate overhead stands at c. $20m/year (correction: annual overhead is c. $90m on adjusted EBITDA TTM basis – expected to decline going forward) and makes only a limited impact to the overall valuation of the company.

The situation exists because LAUR stock has been forgotten and lost sell-side coverage due to the strategic review. The company has been shunned by investors because of the DoJ investigation which has since been dropped. In Jan 2020, the stock had 7 buys, 1 hold, 0 sells with an average price target of $21/share. Currently, only Stifel covers Laureate and has a buy with a $17/share target price.

Directors own just 3.3%, however, the company is effectively controlled by its major shareholder Wengen Alberta (35% of economic value and 80.3% of the voting power). Wengen is a limited partnership formed in 2007 by a number of large investors including KKR to acquire Laureate. In 2017, Wengen took LAUR public in an IPO at $14/share raising $456.5m. Wengen has 3 directors on LAUR board. The information on the partnership is limited, however, according to the recent proxy (April’21), KKR had 28% interest in Wengen (increased from 19% in 2017), CPV Holdings – 19%, Sterling Capital (PE with $81bn AUM), MMF MLP – 3%, Snow Phipps (PE with $2.4bn AUM) – 4%. Apparently, all these big players have been holding LAUR since 2007 and might be interested in cashing out.

Aside from that, KKR has also invested in LAUR independently. In 2016, together with Snow Phipps, it injected $400m in LAUR in return for Series A pref stock. KKR converted the pref. shares and in 2018 owned 5% of LAUR. Interestingly, earlier this year Wengen made two distributions (March and July’21) to its investors, which increased KKR ownership in LAUR to 13.7%. CEO of Snow Phipps also owns 2m LAUR shares personally (1% outstanding shares and also is a director of LAUR).

Given the close involvement of top-tier investors (who have invested in LAUR since 2007), I expect further asset sale and shareholder value unlocking processes to go at maximum efficiency.

 

Additional background and details

Laureate Education is a private Higher Learning Company. They operate a portfolio of degree-granting institutions. Laureate’s Universities are leading brands in their respective markets and offer a broad range of undergraduate and graduate degrees through campus-based, online and hybrid programs. They currently have over 300k students enrolled at 5 institutions with over 50 campuses. More than 75% of students are enrolled in programs of 4+ years.

Coming into 2020, Laureate had assets across the globe. In Jan 2020, LAUR announced that it would explore strategic alternatives for each of its businesses in order to unlock shareholder value. The stock jumped from about $18 to $21+ or from about 7x EV/EBITDA to 8x EV/EBITDA (traded 6.5x – 9x from 2017- early ’20). At the time, this EV included about $1.85bn in net debt or about 6x on the $308mm in EBITDA from 2020.

Since announcing the strategic review, Laureate has already sold their Australia & NZ operations for $653m (Nov’20); Honduras ops for $60m (Mar’21); Chilean ops for $218m (Sep’20); Malaysian ops for $140m (Sep’20); Costa Rican ops for $15m; Brazilian ops for ~ $650m (just closed late May’21 at a higher than expected price due to FX hedging). Currently, LAUR is also in contract to sell US-based Walden University to Adtalem (ATGE) for $1.48B.

Initially, the sale of Walden was conditioned upon approval from The Higher Learning Commission (HLC), the Dept of Education (DOE), and the Council for Accreditation of Counseling and Related Educational Programs (CACREP). Department of Justice (DoJ) investigation was announced last year and the deal review was designated as “under governmental investigation” at the HLC. However, in early April the DoJ concluded their investigation and decided to decline intervention. HLC and DOE approvals were also received on the 13th of July’21. A consent from CACREP should also be received shortly. The transaction will close within 5 days of fulfilling all conditions.

Aside from the Walden sale, LAUR has remaining operations in Peru and Mexico. Peru operations had been seen as a Crown Jewel of the portfolio. The asset grew organically at mid-single digits with  EBITDA margins in the high 30’s. Mexico was less exciting but still low-single digits growth with a low 20’s margin. Since COVID hit, most on-campus learning was shifted to remote and new enrollments were down a bit. Due to this, the company has paused the Strategic Review/Wind Down of assets. In the past, management communicated that they would sell these assets around the same multiple as the Brazilian business which was done at ~ 10x TTM EBITDA.  The belief is they would like to normalize EBITDA here first but would be open to inbound interest.

Currently, there is about $400m of net cash on the balance sheet and the company has $250m authorized for share purchases.

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