Goldman And Providence get geeky with College Co.

The 40-year-old company is, in terms of sales and student body size, among the largest private post-secondary educators on the continent. It has 72 main campus locations in 24 states and in two Canadian provinces and roughly 72,000 students. Academics are vocational, with programs in culinary arts, fashion, media arts, IT, legal and business studies.

The deal price was a 16% premium to the company’s share price the trading day before the deal, and shares have risen as high as $41.97 after the deal was announced. At press time, shares traded at $41.

Paul Salem, senior managing director of Providence and Adrian Jones, a managing director at Goldman, led the deal. The two private equity firms have teamed up before on a number of deals, including the buyouts of VoiceStream, Western Wireless, SunGard and the YES Network.

Education Management has been growing at a steady clip. In its fiscal second quarter ended on Dec. 31, revenues increased 13.3% to $312.6 million and operating income rose 19.6% to $77.9 million. In the same period last year, the company posted sales of $275.8 million and operating income of $65.1 million. The company estimates the enrollment growth will be in the high single digits for the rest of the year.

A source close to the firm said the goals were to grow enrollment and get into the top 50 markets, whereas the firm is currently in about 25 top markets. The other main avenue for growth is in cyberspace with its Argosy Online business. Of its 72,000 students, only 4,000, or 6%, take courses online, whereas at competitors that figure is closer to 50%. The basic message from the company read by the analyst community was that it is easier to expand, and have the earnings volatility that results from expansion, when private.

Completion of the deal is expected mid-year. The transaction is not conditional on financing, and is 40% equity and 60% debt with the two private equity firms being equity partners. The new company therefore will have about $1.3 billion in equity and $1.9 billion in debt, according to an estimate by Harris Nesbitt. Harris Nesbitt also estimated that the multiple on the deal is about 12x trailing 12 months EBITDA, above the peer group median of 10.2x.

Jeffrey Silber, an analyst with Harris Nesbitt, predicted the deal could be delayed beyond the summer of 2006 due to regulatory scrutiny. In a note he put out on March 7, he listed a number of regulatory bodies that will need to approve the deal, including the New England Association of Schools and colleges and the U.S. Dept. of Education. He said the latter’s biggest concern is with the buyers’ financial strength, but overall the possibility of the deal failing is slim.

Lehman Brothers estimates that the implied debt load will be around 7.8x trailing EBITDA. Lehman analyst Gary Bisbee said the chances of a competing bid are small. “It would be difficult for another financial buyer to obtain an attractive internal rate of return by investing more equity at a higher take-out price. Furthermore, no strategic buyers appear to have the combination of financial ability, strategic need and strong stock price to outbid the existing deal,” he wrote in an analyst note.

Also recently in the space, Apax Partners acquired a sizeable minority stake in The Learning Annex, which runs self-help seminars. Learning Annex’s founder, William Zanker, remains the top holder.

A source familiar with the matter said Providence has been looking at the education space for a while. Providence, typically focused on communications and media, was busy last year with its buyout of Metro-Goldwyn-Mayer for $4.94 billion, where it combined with Texas Pacific Group, DLJ Merchant Banking and Sony. Other deals for Providence included the $360 million purchase of Survey Sampling International Inc. and Crown Media’s international business for $242 million.