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Tales Out of School | Private Universities, Public Subsidies

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Source: Brasil Econômico.

Under the mantle of government programs such as Prouni and Fies, private universities see enrollment multiplying.

With a major M&A deal and two IPOs underway, the education sector is entering a second cycle of consolidation, driven by federal funding to Brazilian college students.

After the creation of large conglomerates based on buyouts of small companies with the backing of foreign investors, the next step, according to experts, is to create associations among the largest groups, along the lines of the deal involving Kroton and Anhanguera — under study by antitrust regulators — which promises to create the largest educational company in the world, with more than 1 million students. Experts, however, see risks in the matter of educational quality.

The education sector, whose evolution in the stock exchange has run contrary to the rest of the economy, is seen by market analysts as one of the most promising companies over the next few years. “I believe that, in the middle term, at least, these companies will perform steadily and well,” comments analysty Mário Bernardes Junior, of  Banco do Brasil Investimentos.

“Brazil has 200 million inhabitants, with enormous repressed demand for education. With the increase in household income, more and more persons are able to pay for their studies.,” the analyst concluded. Currently, four major groups have shares listed on the Bovespa  — Kroton, Anhanguera, Estácio and Abril Educação — and two are preparing IPOs — SER Educacional and Anima.

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Veja used as a publicity vehicle for a strategoc division of its group: private education and textbook publishing. Why not use a black face?

 

Among the major companies in the field, only Abril has shown a modest result in the stock exchange, due to the impact of its textbook publishing businesses. In a single year, the exchange lost 11%, Anhanguera shares rose 15%, and the prices of Estacio and Kroton shares rose 41% and 69%, respectively.

“The sector is now a principal focus of investments for foreign investors in Brazil,” said analyst Marcelo Torto, of the Ativa brokerage house. In fact, all the largest companies have foreign investors, such as Advent International, a partner of  Kroton with 53 units in 10 Estados.

I am more interested in the activities of Sylvan Laureate and its local subsidiary, Anhembi.

Since  2007, when the first educational company opened its capital, there was a wave of acquisitions of small players in the sector, as Luis Motta, a partner at KPMG, recalls. There were 133 transactions in the sector since 2008, when the consultancy began to cover the sector separately.

 “Now we are seeing the brakes applied in order to put the house in order. The consolidation of this sector is experiencing a new dynamic, with very substantial mergers.  The trend is toward fewer transactions but with more capital raised,” says Motta, citing the merger of Kroton and Anhanguera as an example.

According to Motta, Brazil tends to follow the European model, with large groups dominating the large cities and smaller institutions in the small cities and towns.  “With greater enrollment, the groups gain scale and bargaining power with suppliers, reducing costs,” Motta says. In the first quarterr, together with an increase in enrollment, all the companies announced better results. At Kroton, for example, profits reported thus far in  2013 —  R$ 271 milhões — represents growth of 132% over the results calculated for the same period in 2012. 

Along with the improved purchasing power of the population, analysts are unanimous in pointing to federal programs — and especially the Student Finance Fund  Fundo de Financiamento Estudantil (Fies) and the University For Everyone Program  (Prouni) — as the principle drivers of growth.

Having disbursed R$ 10 billion between its reformulation in 2010 and last year, FIES finances students in credentialed private universities. Prouni, for its part, guarantees fiscal incentives to private companies that provide opportunities to low-income students. Between  2005 and 2012, R$ 3,6 billion in tax breaks were granted..

“The principal long-term risk is a suspension or reduction of federal financing,” says the analyst for the Banco do Brasil Investimentos. Numbers published by the companies confirm their dependence on educational programs. In a prospectus for an IPO published last week, SER Educacional, based in Recife, said that 40% of its students receive the FIES scholarship. At  Anhanguera, 21% of students are benefited , according to its second quarter results..

Although the companies may also participate in the elementary education market, their bets are on college education, incubated by the federal government. With the arrival this year of the National Program of Access to Technical Training  (Pronatec), which finances students of technical schools, it is possible they may make new investments in this segment in order to take advantage of the infusion of federal funds. In September, a new stage of the program was launched, with scholarships relating to technical skills for industry and the expectation of awarding some 120,000 of these in short order. 

Another bet in the education sector is distance learning. All the major players have distance learning operations, with good potential for low-cost returns.  Anhanguera, for example, invested R$ 20.7 million in the first quarter on technology for distance learning. SER believes that starting next year it will be able to offer 20,000 vacancies to students in this segment. 

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