Laureate aims again for IPO despite challenges
Company faces hurdles with foreign markets, lawsuits
Baltimore-based Laureate Education, which operates universities around the world, is dusting off plans to go public again, despite an array of challenges, including shifting regulatory regimes in key foreign markets, student lawsuits, a corruption investigation tied to a Turkish university and a whistleblower complaint about its accounting practices.
Laureate first registered with the Securities and Exchange Commission for an initial public offering more than a year ago, saying it wanted to pay down its hefty debt by selling stock on the public market.
But the effort stalled amid a turbulent financial market that produced relatively few IPOs and wider scrutiny of for-profit educators. The company also found itself in the crosshairs of the presidential election because of payments to former President Bill Clinton, who acted as “honorary chancellor” for the company.
Now analysts say the company — and the private equity firms that took it private nearly 10 years ago — may see a new window of opportunity, with election season over, stocks soaring and widespread anticipation that a Donald Trump presidency will lead to looser regulation.
Laureate recently updated its filing with the SEC. In a sign an offering may be in a more advanced stage of planning, the company said the sale would occur on the Nasdaq exchange and identified more companies it is working with as underwriters.
“The wind is behind the back of the equity market, and we're getting the Trump bump,” said Jim K. Liew, assistant professor of finance at the Johns Hopkins Carey Business School. “If they want to IPO, this is the right time, from a macro, big-picture perspective.”
Laureate, which owns or operates more than 70 institutions in 25 countries, declined to comment through a spokeswoman, citing the so-called “quiet period” that company officials say prevents them from talking publicly before an offering. The company employs about 1,000 people at its headquarters in Harbor East and more than 67,000 globally.
Even with a more favorable market climate, Laureate remains a risky bet for investors, said Jay Ritter, professor of finance at the University of Florida Warrington College of Business.
The company reported a profit of about $330 million in the first nine months of the year on revenue of about $3 billion, lifted by the sale of some of its universities.
But the company had logged losses every year since at least 2012, according to SEC filings. It also carries more than $4.2 billion in debt, which triggered nearly $400 million in interest payments last year.
The documents do not say how much money Laureate is looking to raise, but Ritter said pricing shares attractively would be key to bringing in investors.
“The main issue is just valuation … how profitable is it and what are its future profits likely to be,” Ritter said. “Looking at the consolidated statements of operation … the company is not highly profitable.”
Laureate, which started as the test prep and tutoring company Sylvan Education Systems in 1989, is no stranger to the pressures of public markets.
It traded publicly for years, before a group of investors that included Kohlberg Kravis Roberts & Co. took the company private in 2007 in a $3.8 billion deal that included $1.7 billion in debt.
The company expanded rapidly after being taken private, aiming to meet the rising demand for higher education from the world's growing middle class. More than 95 percent of its 1 million plus students are overseas, the majority of them in Latin America.
But disclosures to investors required as part of the IPO process make clear the scope of the challenges Laureate faces, said Kevin Kinser, professor of higher education policy at Pennsylvania State University.
Amid slower economic growth, governments have cut education spending in key markets, such as Brazil. Regulators around the world also are introducing tighter rules aimed at for-profit universities.
Laureate's relationships with schools that operate like nonprofits have raised questions for some time, Kinser said. In Chile, two of Laureate's universities are being investigated by regulators there over their nonprofit status. Taxing authorities in Spain expanded an audit of Laureate subsidiaries there earlier this year.
“What we're seeing around the world is that other countries that were formerly quite receptive to the for-profit model are starting to become a bit more questioning about how this works,” Kinser said. “The jury's out on whether this model, the big, corporate, publicly traded university model, is a stable organizational form, given the regulatory challenges it seems to have in almost every place it emerges.”
Laureate said in its SEC update that officials believe all of the company's institutions in Chile are in “full compliance” with the law, and that they are appealing an assessment from Spanish tax authorities.
The company faces domestic challenges as well.
U.S. regulators this fall required the company to increase its credit, citing concerns about its level of “financial responsibility.”
The Minnesota Office of Higher Education also is reviewing the doctoral programs at Laureate's online school, Walden University. Students recently filed complaints in federal court in two states, claiming Walden misled them about how long it would take to get a degree and systematically prolonged the process after they enrolled. They are seeking class-action status for what they estimate could be more than 13,000 students.
Laureate said in the SEC filing that it intends to defends itself “vigorously” in both cases; it has already moved to dismiss the claims.
Laureate also told investors in the regulatory filing that it is dealing with weaknesses in its financial controls.
The company has launched an internal investigation related to a university in Turkey for possible violations of the federal Foreign Corrupt Practices Act, stemming from an $18 million payment that Laureate said an internal audit revealed did not go to the intended recipient. The company also has notified the SEC and Department of Justice.
The company said in a statement that it is taking steps to “enhance … internal controls and compliance policies” and is “committed to operating at the highest level of integrity.”
Its former chief accounting officer, Michael S. Ryan, also filed a whistleblower complaint with the Department of Labor in November, alleging the company violated financial rules.
In the SEC update, Laureate called the claims “baseless.”
Ryan couldn't be reached to comment.
Analysts said wide-ranging risks are not unusual when dealing with multinational corporations and are unlikely to derail a deal. But the disclosures will raise questions for investors, they said.
“IPO investors are generally more sensitive to accounting and reporting issues ... so investors will want this cleared up,” said Matt Kennedy, analyst at Renaissance Capital, which manages IPO-focused exchange traded funds. He said if financial fraud is proven, that creates the prospect of steep losses.
As the company moves forward, CEO Douglas L. Becker will have to move aggressively to address the firm's debt, said Liew, the Hopkins professor. Liew said the firm will likely consider selling off some of its assets, cutting costs and focusing on the more profitable online business.
“He clearly has to take some bold steps,” Liew said. “I think it's going to be really exciting to watch.”