Brazil's education still smart despite regulatory blow
Tarpon takes control of Abril for R$1.3 billion; new regulation might limit numbers of higher students.
Brazil’s education sector continues to be a target for M&A, despite a regulatory change that sent previously booming education stocks tumbling.
Over the Christmas period the government unexpectedly announced changes to how it funds private-sector higher education – part of a wider shift to tighter fiscal policy after October’s presidential election.
Ser Educacional was one of the worst hit. Its shares fell 40% in the first six weeks of the year. Stocks of Kroton, the biggest company in the sector, fell around 25% after roughly tripling in price in 2013 and 2014.
Despite that volatility, one of the biggest M&A deals in Brazil so far this year has been in education. This was a R$1.3 billion ($450 million) acquisition of a controlling stake in Abril Educação, by a unit of Tarpon, a local private equity group, announced on February 9. Tarpon is increasing its stake in Abril to 40.6%, thanks to the sale of a 20.7% stake by the founding Civita family.
The regulatory announcements affect Abril less than others, as it is focused on pre-university education. Although Abril’s stock had fallen around 10% in 2015 before the sale was announced, the company could benefit from changes in government education policy, says Luis Azevedo, education sector analyst at Bradesco BBI. A shift towards quality over quantity in higher education means the state “will have to invest more in basic education”, he says.
The new regulations mean students must gain a minimum secondary school exam score to receive funding for on-campus higher education. More worryingly for investors, the government also announced a reduction in the annual up-front payments that private universities receive from the state, potentially increasing working capital needs.
After the government said in late February that up-front payments would return to their previous schedule after 2015, Azevedo says the larger companies such as Kroton and Ser could still feel comfortable enough with their cash positions to embark on acquisitions in the sector, although he says “the question mark is size”.
Last year’s merger of Kroton and Anhanguera created the world’s largest private-sector education provider by market capitalization, with more than one million students. Azevedo says the bigger Brazilian education companies may now be more likely to target providers with around 15,000 students or less.
Gabriela Cortez, education analyst at Banco do Brasil, agrees that despite the new regulations, there is still a “positive scenario” for education stocks, including higher education. She also says there is scope for bigger players to snap up smaller rivals. “It’s a huge market,” she says. “Less than 10% of the population has had a higher education. […] It’s still fairly fragmented. Lots of universities are run by families in the second or third generation.”
Private equity funds and foreign education firms could also embark on buyouts in the sector, says Azevedo. He says one potential target could be Uniasselvi, a distance learning provider (and therefore not subject to the new regulations on student funding) that Kroton has to sell as an anti-trust condition of its merger with Anhanguera.
Speaking to Euromoney in mid-February, Patrice Etlin, managing partner at Advent International, says the regulatory announcements make it “an interesting moment to look at” an acquisition in Brazil’s education sector. Previously a joint-controlling shareholder in Kroton, Advent last year raised the biggest-ever Latin America private equity fund, at $2.1 billion.