Apollo Delves Into Education –

Apollo Management is looking to relive its glory days with its latest acquisition, the $300 million purchase of Sylvan Learning Systems’ K-12 education businesses. The deal comes as Sylvan moves to direct its focus solely on global post-secondary education, and accompanies Sylvan’s decision to disband its money-losing Sylvan Ventures subsidiary. The transaction is expected to close in either the second or third quarter of 2003.

Apollo was already familiar with Sylvan going into the deal, having invested $200 million into the company in February 2000, with $100 million in the form of convertible debentures, while the other $100 million went toward the startup of Sylvan Ventures. The Sylvan venture arm was a $500 million subsidiary used to invest in startups and emerging Web technology in the education and training sector. While the venture arm-sometimes compared with such incubators as CMGI and Internet Capital Group Inc.-received an enthusiastic response from shareholders at its inception, the group’s mounting losses started to weigh on investors’ patience. And as part of Apollo’s acquisition of the K-12 businesses, Sylvan agreed to buy out Apollo’s 25% holding in the subsidiary. U.S. Bancorp Piper Jaffray and Credit Suisse First Boston advised Sylvan on the transaction, while J.P. Morgan advised Apollo.

In the deal, Apollo, through its newly formed Educate, Inc. holding company, will acquire Sylvan’s retail and institutional K-12 tutoring businesses, the Sylvan Learning Center, Schulerhilfe and Sylvan Education Solutions. The firm will also take over Sylvan’s ownership interests in eSylvan, an online tutoring service, and virtual charter school developer Connections Academy, both of which were part of Sylvan Ventures.

The deal, valued at roughly 8.4 times EBITDA, calls for Apollo to pay between $112 million and $117 million in cash, the retirement of up to 75% of Sylvan’s outstanding convertible debentures held by the firm (valued at $60 million), a $55 million six-year subordinated note and Apollo’s preferred interest in Sylvan Ventures, worth roughly $45 million. Further, Apollo will pay between $3 million and $13 million in deferred or contingent earnouts, depending primarily on the performance of Connections Academy.

Sylvan Learning Centers and Sylvan Education Systems took in a combined $33.9 million in EBITDA in 2002, of which Sylvan Learning Centers contributed $26 million, not including $13 million in K-12 G&A costs. Connection Academy and eSylvan, meanwhile, accounted for a total loss of $14.5 million in 2002, with eSylvan contributing to the bulk of the losses.

In the Sylvan Learning Centers business, Apollo will gain one of Sylvan’s most prized assets. In a note to clients, Banc of America Securities said, “We have long considered the Learning Center business to be the most attractive of Sylvan’s businesses. Its cash returns are the strongest, its brand equity the most distinctive and its market position the most formidable.” The firm added, sounding almost wistful, “We will miss our coverage of the Learning Center business that was a favorite.”

However, that’s not to say that investors were disappointed in Sylvan’s divestiture and strategy change. In fact, shares of Sylvan jumped as much as 30% following the deal’s announcement and Banc of America, in the same note, said, “Sylvan has granted itself an opportunity to right its ship. The post-secondary business is a great business and it should generate…shareholder value.”

Following the sale, Sylvan will still control six colleges in Europe and Latin America and its online universities, Walden and National Technological University. The company will remain on the public markets, but intends to change its name in the coming year, and will also subsequently change its ticker symbol.

Legg Mason reiterated its “buy” rating on Sylvan stock following the deal and commented that the “reduced complexity should be well received.”

Still, there were others who said Sylvan undersold the assets. ThinkEquity Partners said in a note that since “the price and quality of consideration is so low… we would expect [that] the entire company could be in play as other strategic buyers consider the company’s break-up value.”

Apollo used its $3.6 billion Apollo Investment Fund IV LP for the transaction, which is just about fully committed. The firm is currently investing out of its Apollo Investment Fund V, which closed in 2001 with $3.8 billion.