The document summarizes a private equity presentation on acquiring DeVry Inc., a for-profit higher education company. The presentation covers an introduction to DeVry, an industry analysis showing growth opportunities but also DeVry's weaknesses in margins and asset utilization, DeVry's business model of growing revenues through acquisitions and predictable cash flows, an investment thesis to increase enrollment, optimize resources, and reduce costs, a proposed $2.52 billion acquisition using 30% equity and 70% debt financing, projections of strong returns, and risks and mitigation plans around economic slowdowns, competition, and integration challenges.
1. Private Equity Final Presentation
Friday, March 23, 2012
Yiu Lau, Daniel Möllerhenn, Ram Peri, Xin Yu
2. Agenda
Introduction and Overview
Industry Analysis
Business Model and Revenue Streams
Investment Thesis
Valuation and Transaction Dynamics
Risk Analysis and Mitigation Steps
Conclusion
3. Company Overview
Company Overview Stock Performance (NYSE Ticker: DV)
DeVry is a for-profit higher education organization
Founded in 1931, named DeVry University in 2002
Enrollment of 80,000+ undergrad and grad students
200,000+ graduates in the last 25 years
90+ campuses throughout US, Canada, Brazil
Headquarters: Downers Grove, IL
Market cap: $2.3B
Revenue 2011: $2.2B - CAGR 2008-2011: 26%
EBITDA 2011: $491M
CFFO 2011: $408M - CAGR 2008-2011: 27%
Debt 2011: $0
Three Major Business Segments Financial Highlights
Business, Management and Technology % of Op Op
Segment Revenue
– DeVry University, Keller Graduate School of Total Income Margin
Management, Carrington College Business, Tech,
– Highest operating margin, biggest segment 14.60 19.73% 359 25%
Management
Healthcare and Nursing Medical/
– Ross University, Chamberlain College of Nursing, 5.58 7.54% 107 19%
Healthcare
American University, Carrington College
– High growth in demand for nurses Professional,
1.64 22.2% 33 20%
K12, International
Professional Training and K12
– Becker Professional Educator, Advanced Academics Totals (FY11) 21.82 29.49% 499 23%
Source: FactSet Data, Company Data, http://www.aacn.nche.edu/media-relations/fact-sheets/nursing-shortage, DeVry Inc, 2011 10-K
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4. Agenda
Introduction and Overview
Industry Analysis
Business Model and Revenue Streams
Investment Thesis
Valuation and Transaction Dynamics
Risk Analysis and Mitigation Steps
Conclusion
5. Industry Analysis
Recent Revenue Development (in $M)
Recent Revenue Growth Market Share by Revenue in 2011
Revenue Growth Rates 2008 2009 2010 2011
DeVry Inc 17% 34% 31% 14%
Apollo Group 15% 26% 25% -4%
Education Management 24% 19% 25% 15%
Career Education -1% 11% 16% -10%
Corinthian Colleges 17% 23% 35% 6%
ITT Educational Services 17% 30% 21% -6%
Bridgepoint Education 156% 108% 57% 31%
Lincoln Educational Services 15% 47% 16% -20%
Strayer Education 25% 29% 24% -1%
Industry Average 16% 26% 26% 2%
Source: 10-K fillings of competitors
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6. Industry Analysis
Valuations and Multiples of the Industry in 2011
EV/EBITD
P/E EV/Sales EBIT Margin % Sales/Assets
A
DeVry 10.32 0.94 15.82 4.28 1.18
Apollo 9.95 0.92 23.27 3.58 1.45
Education Management 10.39 1.11 15.35 5.37 0.63
Career Education 4.59 0.06 12.26 0.41 1.43
Corinthian Colleges 12.47 0.27 3.18 3.77 1.55
ITT Education Services 5.67 0.95 33.81 4.48 0.58
Bridgepoint Education 8.07 1.05 29.33 3.51 1.52
Lincoln Educational Services 7.22 0.36 8.83 2.58 1.41
Strayer Education 11.14 1.83 28.55 5.98 2.71
Industry Average 8.87 0.83 18.93 4.19 1.39
Key Takeaways
DeVry’s position and main weaknesses:
– Valuation lags behind leaders such as
Apollo and Strayer
– Inefficient cost control; low EBIT
margin
– Underutilized resources; low
Sales/Assets ratio
Source: 10-K fillings of competitors
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7. Agenda
Introduction and Overview
Industry Analysis
Business Model and Revenue Streams
Investment Thesis
Valuation and Transaction Dynamics
Risk Analysis and Mitigation Steps
Conclusion
9. Growing Revenues and Predictable Cash Flows
Revenue M&A
Stable growth in revenue and net income due Fanor ($23.5M) – leading provider of private
to organic growth and acquisitions post-secondary education in Brazil
Students are not likely to drop out due to U.S. Education Corporation ($290M) –
economic slowdowns provider of healthcare education through
certificate/associate programs
But new student starts are influenced by
economic slowdowns (i.e. improving Advanced Academics ($27.5M) – leading
unemployment rate would encourage provider of online secondary education
enrollment) services
Cash Flows Financial Highlights
DeVry generates stable operating cash flows 2008 2009 2010 2011
CFO has grown by 29% CAGR for past 3 Revenue 1,092 1,461 1,915 2,182
years while revenue has grown at 26% Growth - 33.8% 31.1% 13.9%
CAGR Net Income 126 166 280 330
CFO 197 250 392 408
CFO consistently stands at 17-24% of assets Capex 63 74 131 136
CFO/Assets 19.4% 17.4% 24.1% 22.1%
Source: FactSet Data, Company Data, http://www.aacn.nche.edu/media-relations/fact-sheets/nursing-shortage, DeVry Inc, 2011 10-K
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10. Agenda
Introduction and Overview
Industry Analysis
Business Model and Revenue Streams
Investment Thesis
Valuation and Transaction Dynamics
Risk Analysis and Mitigation Steps
Conclusion
11. Investment Thesis
1. Increase Student Enrollment - Grow Revenue
High fixed cost means high operating leverage
– Each additional student can be served at a small incremental cost
– Boost number of students to maximize usage of these fixed costs
Differentiate curriculum
– Design more programs focusing on fastest growing sectors such as nursing and healthcare
– Involve employers in curriculum design and hire industry leaders and experts as instructors
– Initiate study abroad-like program to better connect international students/consumers (these
also tend to be higher margin programs)
Enhance job placement results
– Establish academia-industry alliances to match graduates and employers
– Enhance career services and develop alumni networks to enhance job placement results.
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12. Investment Thesis
2. Optimize Resource Utilization - Increase Sales / Assets Ratio
Provide discounts to encourage seasonally weak summer enrollment
Expand facilities and widen course offerings at campuses in key population centers
Consolidate and/or share suburban and rural campus space while also renting out unused
capacity
Upgrade the facilities of Carrington Community College to make them suitable for use by
DeVry’s high-margin postgraduate degree programs
3. Reduce Costs - Increase EBIT Margin & Lower SG&A
Integrate online course delivery system and admin functions across different brands to create
synergies and reduce operating costs
Create a more universal marketing campaign which encompasses and links the various specialties
Devry offers
Tighten credit check process upon student enrollment to lower student loan default rates and
collection costs
1. http://www.aacn.nche.edu/media-relations/fact-sheets/nursing-shortage
2. DeVry Inc, 2011 10-K
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13. Agenda
Introduction and Overview
Industry Analysis
Business Model and Revenue Streams
Investment Thesis
Valuation and Transaction Dynamics
Risk Analysis and Mitigation Steps
Conclusion
14. The Deal
Structure Transaction Dynamics
Purchase price: $2.52B Pay 30% premium over latest closing price
($44/share) to acquire company
30% Equity – $720M
– Time frame: 3 – 6 months to close deal
70% Debt – $1.80B
Bring in new managers for cost cutting and
– 70% Mezzanine paid over 5 years
streamlining various divisions
– 30% Senior paid over next 5 years Exit via sale to strategic buyer after 5 years
Assumptions Results
Average growth rate: 14 % Valuation at exit: $5.50B
Debt/Equity: 2.33 (Post-LBO) IRR: 22% (base case)
Borrowing costs: 7-9% interest rate CoC: 3.5 years
Pre-LBO EV/EBITDA: 5.2 Total value to equity investors: $5.0B
Post-LBO EV/EBITDA: 5.2 (no expansion)
Source: FactSet Data, Company Data, http://www.aacn.nche.edu/media-relations/fact-sheets/nursing-shortage, DeVry Inc, 2011 10-K
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15. Unlocking Value
COGS + SG&A is currently around
81% of revenue
Our target is lower to (through the
methods described in investment thesis)
around 72-74%
This improvement puts DeVry in line
with current industry leaders
High operating leverage business means
it is essential to grow student volume
Our belief is that we can at least sustain
the current growth rate of 14% if not
expand
Improving domestic macro conditions
and further international expansion will
help drive top-line
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16. Agenda
Introduction and Overview
Industry Analysis
Business Model and Revenue Streams
Investment Thesis
Valuation and Transaction Dynamics
Risk Analysis and Mitigation Steps
Conclusion
17. Key Risks and Mitigation Solutions
The economy slows down, causing enrollment to drop further.
Plan expansions carefully, based on projected population and economic growth in each region.
Competition tightens, with competitors poaching current students.
Differentiate on education quality, job placement results and branding.
Strengthen online course delivery platform to enhance flexibility to students.
Create student clubs and communities to form a bond among current students.
The revenues do not offset the fixed costs.
Consolidate IT systems, administration and careers services across member institutions.
Sell off unprofitable and underused campuses. Negotiate lease termination.
Difficulties encountered in post-acquisition integration
Grow organically
Carefully assess synergetic potential and cross-selling opportunities before making an acquisition.
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18. Agenda
Introduction and Overview
Industry Analysis
Business Model and Revenue Streams
Investment Thesis
Valuation and Transaction Dynamics
Risk Analysis and Mitigation Steps
Conclusion