Sylvan Learning Systems Inc. announced last week that it was selling its tutoring and other K-12 educational businesses so it could focus on its recent push into online and overseas higher education services.
Apollo Management LP, a New York City-based investment firm, is acquiring the K-12 businesses and will form a new corporate entity called Educate Inc. But the new company will still do business as Sylvan Learning Centers and other variations.
The transaction comes in spite of a still-new federal policy with lucrative potential for the company’s bread-and-butter tutoring services: the requirement under the federal “No Child Left Behind” Act of 2001 that many struggling schools offer after-school supplemental learning to students.
“We’re very excited about where the K-12 business is going,” said R. Christopher Hoehn-Saric, a Sylvan executive who will become the chief executive officer of the new company. Retaining the Sylvan Learning Centers and keeping the brand is a key part of it. Consumers won’t notice any difference at all.”
Douglas L. Becker, Sylvan’s chairman and CEO, said the decision to refocus the company as a higher education player came after an internal study showed that its recent move into online degree programs in the United States and for-profit college campuses abroad offered a potential for much faster earnings growth.
“We realized the K-through-12 business was not going to be able to match the growth rate of the postsecondary business,” he said in announcing the deal on March 11. The original company in time will get a new name, he added.
In 1999, 65 percent of the company’s revenues came from its K-12 units. Now that share is only 37 percent.
Additional Investment
The Baltimore-based company is also responding to several years of a depressed stock price, due largely to a view on Wall Street that Sylvan had too diverse a mix of businesses.
“We have been too complicated a company, making it difficult for investors to get excited about us,” Mr. Becker said.
Investors gave the deal good initial grades. Sylvan’s stock, which was trading on the NASDAQ stock market near its 52-week low of $9.46 a share before the deal was announced, jumped about 30 percent afterward. It closed at $15.97 on March 13.
Jeffrey M. Silber, an analyst who follows Sylvan at the New York City investment firm Gerard Klauer Mattison, said that the company’s tutoring centers have been profitable, but that their success was not enough for Sylvan to win favor on Wall Street.
“Investors have been clamoring for a much simpler ‘story’ ” about the company, he said. “The K-12 business has a solid brand name and great management. It’s a cash cow. But if Sylvan is going to be spending a lot of capital, they might as well spend it on a faster-growing business.”
Apollo Management, which is not affiliated with postsecondary school operator Apollo Group Inc., is a major Sylvan shareholder and a partner in the financially disastrous Sylvan Ventures unit. The venture arm was launched in 2000 to invest in promising Internet education projects, but it got going just as the technology boom was coming to an end.
When the dust settles, Apollo will end up paying between $275 million to $300 million to acquire the K-12 assets, Mr. Becker said.
Among the precollegiate assets going to Educate Inc. will be eSylvan, a so-far unprofitable push into online tutoring, and Connections Academy, a nascent effort to tap the world of online charter schools and home schooling.
Mr. Hoehn-Saric said the new K-12 company was likely to give eSylvan and Connections Academy time to develop into profitable units. “They represent very big opportunities that require additional investment,” he said.
More than 900 Sylvan Learning Centers, a majority of which are franchises, are operating in North America.
A current TV ad campaign depicts students as being transformed by the company’s tutoring, with their parents amazed to find them now enthusiastic about reading or doing homework. “This moment brought to you by Sylvan Learning” is the tagline.
From Suburbs to Spain
Sylvan was founded in 1979 in a Portland, Ore., suburb, then grew nationally through franchising and its 1985 purchase by Kinder-Care Learning Centers Inc., a major child-care chain. Mr. Becker and Mr. Hoehn-Saric were entrepreneurial partners who made their first fortune developing a technology to store medical data on a wallet-size card.
They took control of Sylvan in the late 1980s, then took the company public in 1993. The tutoring centers sometimes drew criticism for awarding students toys and trinkets when they completed lessons, as well as for being out of financial reach for families not earning comfortable incomes.
In the early 1990s, the company began offering its services inside public schools, usually in low-income areas where school districts could spend their federal Title I money for tutoring.
That service has grown steadily, but observers suggest it is really poised to take off with the supplemental-services provision of the No Child Left Behind law.
“We’re approved in 23 states as a supplemental-services provider, with a handful of other states pending,” said Jeff Cohen, the president of Sylvan Education Solutions, which will be part of the new K-12 company.
The use of the supplemental-services option by children in failing schools got off to a slow start in this first school year under the new federal law, but Sylvan is tutoring some 2,400 children under its auspices, Mr. Cohen said.
Throughout the 1990s, Sylvan Learning branched out in a variety of areas, such as distance learning and teacher training in the United States through its Walden University and Canter & Associates units. And beginning with the 1999 purchase of roughly half ownership of a private university in Spain, Sylvan steadily began looking overseas for new growth opportunities.
It has since acquired ownership interests in a hotel-management school in Switzerland and private universities in Chile, France, and Mexico. Its next target markets are India and China.
Counting the red ink at Sylvan Ventures, the company had a net loss of $96 million in fiscal 2002 on revenues of $604 million.
