M&A Deals of the Year
When virtual education company Connections Education LLC began about a decade ago, it was a startup in an industry that didn't yet exist. Online schooling was slowly taking root to complement or augment traditional public schools. But it was early days for e-learning, and there was no shortage of detractors.
Soon after inception in 2001, Connections, originally Connections Academy and part of education group Sylvan Learning Systems Inc., faced litigation and criticism in Wisconsin and North Carolina over state tax dollars funding virtual charter schools serviced by a for-profit entity. But New York buyout giant Apollo Global Management LLC "fell in love with it," as advocates led by senior partner Larry Berg put it.
Apollo invested $80 million in publicly traded incubator Sylvan in 2000. In 2003, it bought Sylvan's K-12 tutoring centers, eSylvan and Connections Academy for less than $300 million, swapping its original equity. The mature pre-K-12 tutoring operations became Educate Inc., which went public in 2004.
Apollo carved out Baltimore-based Connections Academy in 2004, taking 70% ownership. Sterling Partners was later invited to take a minority stake partly because its presence in Baltimore could provide localized support. The company operates full-time, tuition-free, K-12 virtual schools that derive revenue from contracts with public-school systems and charter schools in about 23 states. It also runs full-time and part-time private-school programs through National Connections Academy.
By 2011, Connections was billed as the second-largest K-12 provider -- with about $200 million in revenue as of September and no debt -- but it was too small to withstand the vagaries of a public company. Yet it was attractive to strategic buyers in education trolling for growth assets. U.K. publishing giant Pearson plc wanted it most, paying $400 million for Connections in a deal announced in September.
The sale allowed Apollo, Sterling Partners, management and some longtime Sylvan investors, including Citigroup Inc., to share the bounty. For Apollo, which raked in $280 million, or about 20 times cost, it was a unique asset that returned more than its money's worth.
Connections and a few other for-profit cyberschools tapped into a rich vein of widespread dissatisfaction with public-school systems that propelled home schooling and charter school movements across the country. As founders, led by president and CEO Barbara Dreyer, had envisioned it, Connections aimed to provide parents and students an alternative to classroom education where individual learners in certain situations may benefit from a computer-based curriculum supervised at home by a parent or an instructor.
The company has grown about 30% per annum, but it's not been easy. While enrollment was rising, revenue was lumpy. Cracking a state or adding students required capital for grass-roots organizations, educating families and acquiring management systems. Some years growth was limited by management capacity. Teachers' unions or politics could pose hurdles, such as when contract approvals for a grade addition in a Texas school didn't come through even after students had enrolled; Connections bit the bullet anyway.
Management kept sight of costs, executives say, not spending time in loss-leader states where reimbursements weren't high enough to justify the company's presence, or looking abroad. The business turned a profit in 2006 on $25 million in revenue.
Its largest competitor, Herndon, Va.-based K12 Inc., founded in 2000 and now public with a market capitalization of $685 million, had first-mover advantage. That benefited Connections because it helped pave the way in areas that already championed the use of technology in schools.
The controversy over charter schools and online providers hasn't ebbed, though a comprehensive, unbiased analysis of K-12 online schooling is difficult to come by. One meta-analysis presented by the U.S. Department of Education with SRI International indicated that online instruction combined with face-to-face elements had advantages over purely online instruction, suggesting a future emphasis toward blended learning.
For Connections' stakeholders, the way to be successful "was to be 100% committed to quality," says Adam Nordin, a Barclays Capital managing director who worked on the company's auction. Apollo's commitment was driven in large part "by respect for the contribution that the business makes to education."
Connections persevered in a sector that is still populated by only a handful of providers, according to the National Education Policy Center at the University of Colorado in Boulder. K-12 is evidently a complicated marketplace littered with businesses that haven't worked out. Connections was one that did.