Description

LAUR is an interesting combination of an event-driven and value investing setup.

For general background on LAUR I refer you to ruby831’s writeup from July 2019.  Since the last comment on that post is from over a year ago, and much has changed for LAUR I am refreshing this idea.

LAUR is/was a global collection of for-profit education assets which was expected to completely liquidate after divesting its assets following a strategic review launched in January 2020.  Over the course of 2020 Laureate made significant progress in selling its operations in Chile, Malaysia, Australia, and New Zealand.  An agreement was also made to sell its US based Walden University to Ad Talem (ATGE).

In February  2021, LAUR announced that it would continue to operate its Mexico and Peru assets for the time being with the inference that they did not receive sufficient bids.  While management has been clear that this is not a permanent decision, it was a disappointment to many event-driven holders who were playing for a full liquidation.  The over the course of 2021 there were also some doubts raised over the deal to sell Walden.  An activist in Ad Talem was vocal in criticizing the acquisition.  This criticism was bolstered by an ongoing DOJ investigation into the nursing program at Walden which threatened to hold up critical regulatory approvals of the divestiture.  

In April 2021, Laureate announced that the DOJ investigation had concluded favorably which eliminated any remaining obstacles to the Walden sale which is now expected to close in short order.

At June 2021, Laureate had a net cash position of $354MM, with an additional net proceeds of $1.3B in the pending asset sale pipeline, for a pro-forma net cash balance of $1.65B or $8.77/share.  2022 Guidance put out on the 1Q21 earnings call projected AEBITDA of $280MM from the remaining education assets in Mexico and Peru.  These are decent quality higher education assets serving over 300k students which were hampered by COVID in 2020/2021 but are expected to experience a strong reopening recovery in 2022.  Current trends appear favorable and in their 2Q release LAUR raised FY2021 AEBITDA guidance from $180-190MM to $205-215MM with total enrollments now expected at 350k versus previous guidance at 337K.  The Covid situation is of course very dynamic and Delta could move things around but this should be timing noise at a big picture level.  

At 10x 2022 EBITDA the remainco is worth $2.8B or ~$15/share.  Laureate has been cagey thus far about how it would return its excess capital, with an update expected following the close of the Walden sale, but they have been clear that the capital will be returned.  If they simply paid the cash as a dividend it would be $8.77/share for a total LAUR value of $23.77.  The total value is higher if LAUR repurchases a meaningful number of its shares.  If LAUR repurchased shares with its excess cash position at a price of $17, (roughly 10% above today’s level) it would reduce the existing share-count to 91MM shares and the value of the remainco/shr would rise to $31.  While the reality will probably fall somewhere in the middle this yields a total return in the range of 50-100%.

Laureate is unlikely to remain a public company for long.  The majority of stock is held by private equity investors who presumably want a clean exit.  These assets remain on the block and interest may well pick up once the Covid shock is firmly behind us.  

It should be mentioned that Peru is on the “of concern” list for many investors following their recent Presidential elections.  However, the educational sector has not been a focus of political concern (versus the mining sector) and the Peruvian constitutional structure (with a relatively conservative legislature) means that the Presidential administration has real limits on their ability to enact radical change.  2Q guidance was issued when the PEN/USD was at 3.96 while the currency is currently at a low of 4.09.  With Peru making up roughly half of EBITDA these currency moves are real but don’t dramatically move valuation ratios.  Investors concerned with these risks may wish to hedge the currency/political risks here.  On the other hand, net of cash the remainco trades at 4.5x ’22 EBITDA guidance so there is already a decent margin for error.  

Catalyst

Capital return in force once Walden closes

Continuing COVID recovery

Sale of Mexico/Peru assets