Select Equity Group, Inc. announced that it sent a letter dated June 11, 2007, to the independent board members of Laureate Education, Inc. in which it stated that the revised offer of $62 per share does not represent fair value for the Company. In the letter, Select Equity says two material changes have occurred since the original offer was made:
If the terms of the revised offer are not amended to better reflect the intrinsic value of Laureate, then Select Equity will not support the proposed transaction and will not tender its shares. The full text of the letter follows:
Dear Independent Member of the Board:
Select Equity Group, Inc., owner of 9.8 percent of Laureate Education, Inc.’s shares, believes the revised $62 offer for Laureate does not represent fair value for the Company. Since the original offer from a management-led buyout group in January, there have been two material changes: 1) Laureate’s results exceeded guidance, and the Company’s March SEC filings revealed management EPS projections of $5.70 in 2010, 14 percent higher than prior public guidance; and 2) the public valuations of Laureate’s self-selected peer group increased approximately three multiple points to 24 times 2008 earnings.
Despite these new facts, the revised offer for Laureate is only 2.5 percent above the original offer, a negligible increase that values Laureate at a deeper discount to its peers today than the original offer did in January. Given that Laureate currently trades at a meaningful discount to its peers despite higher growth rates and a more predictable business model, we believe that Laureate’s shares would trade above $62 if the tender offer and merger proposal were to fail.
Laureate’s operating performance has been robust, exceeding management’s own public guidance. The online division – which had been a cause of significant investor concern during 2006 – is rebounding strongly: New enrollment, revenue and operating income (excluding non-recurring expenses) grew 25 percent, 32 percent and 128 percent in the first quarter, respectively. Organic, campus-based enrollment growth remains solidly in double digits. The effects of these operating improvements are best evidenced by the release in March 2007 of the Company’s own internal guidance for 2010 of $5.70 in earnings per share, a full 14 percent higher than the $5.00 per share stated repeatedly before the original deal was accepted.(1)
The valuations of Laureate’s peers have improved dramatically. Currently, the Laureate peer group – as defined in the Company’s 2006 Proxy Statement – trades at approximately 24 times 2008 earnings, three multiple points higher than the 21 times 2008 earnings average when the original deal was announced in January.(2) Given that three of the six peers have flat to declining earnings, shareholders should consider the average peer multiple of 24 times 2008 earnings a floor in analyzing Laureate’s fair value. This would suggest a price of at least $75 for the Company. As we have noted before, Laureate should, however, trade at a premium to this peer group.
Select Equity does not support a transaction at these levels and will not tender its shares at $62.
Sincerely, John D. Britton and James R. Berman, Principal General Counsel
(1) See Laureate’s Form SC 13E3 EX-99(C)(4) filed with the SEC on March 16, 2007, slide 13. (2) This peer group excludes certain businesses similar to Laureate’s that trade at even higher valuations such as Capella Education (currently trading at 30 times 2008 earnings) and Anhanguera Educacional Participacoes S.A. (currently trading at 26 times 2008 earnings). Select Equity Group, Inc.[tags]Laureate Education, Select Equity Group[/tags]
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