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Private Equity Final PresentationFriday, March 23, 2012Yiu Lau, Daniel Möllerhenn, Ram Peri, Xin Yu
Agenda    Introduction and Overview    Industry Analysis    Business Model and Revenue Streams    Investment Thesis  ...
Company Overview                              Company Overview                                                            ...
Agenda    Introduction and Overview    Industry Analysis    Business Model and Revenue Streams    Investment Thesis  ...
Industry Analysis                                              Recent Revenue Development (in $M)                         ...
Industry Analysis                                       Valuations and Multiples of the Industry in 2011                  ...
Agenda    Introduction and Overview    Industry Analysis    Business Model and Revenue Streams    Investment Thesis  ...
Business Model Highlights                            8
Growing Revenues and Predictable Cash Flows                                          Revenue                              ...
Agenda    Introduction and Overview    Industry Analysis    Business Model and Revenue Streams    Investment Thesis  ...
Investment Thesis                        1. Increase Student Enrollment - Grow Revenue   High fixed cost means high opera...
Investment Thesis                           2. Optimize Resource Utilization - Increase Sales / Assets Ratio      Provide...
Agenda    Introduction and Overview    Industry Analysis    Business Model and Revenue Streams    Investment Thesis  ...
The Deal                                          Structure                                                               ...
Unlocking Value   COGS + SG&A is currently around    81% of revenue   Our target is lower to (through the    methods des...
Agenda    Introduction and Overview    Industry Analysis    Business Model and Revenue Streams    Investment Thesis  ...
Key Risks and Mitigation SolutionsThe economy slows down, causing enrollment to drop further.   Plan expansions carefully...
Agenda    Introduction and Overview    Industry Analysis    Business Model and Revenue Streams    Investment Thesis  ...
Education is good business.
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DeVry Inc. LBO Analysis.

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A LBO recommendation for Devry Inc. - (DV).
Prepared for Private Equity Course at NYU Stern.

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  • Fixed costs: Curriculum design, instructor recruitment, campus construction, online course delivery system, marketing, student acquisition, job placements services.
  • Transcript of "DeVry Inc. LBO Analysis."

    1. 1. Private Equity Final PresentationFriday, March 23, 2012Yiu Lau, Daniel Möllerhenn, Ram Peri, Xin Yu
    2. 2. Agenda  Introduction and Overview  Industry Analysis  Business Model and Revenue Streams  Investment Thesis  Valuation and Transaction Dynamics  Risk Analysis and Mitigation Steps  Conclusion
    3. 3. Company Overview Company Overview Stock Performance (NYSE Ticker: DV)  DeVry is a for-profit higher education organization  Founded in 1931, named DeVry University in 2002  Enrollment of 80,000+ undergrad and grad students  200,000+ graduates in the last 25 years  90+ campuses throughout US, Canada, Brazil  Headquarters: Downers Grove, IL  Market cap: $2.3B  Revenue 2011: $2.2B - CAGR 2008-2011: 26%  EBITDA 2011: $491M  CFFO 2011: $408M - CAGR 2008-2011: 27%  Debt 2011: $0 Three Major Business Segments Financial Highlights  Business, Management and Technology % of Op Op Segment Revenue – DeVry University, Keller Graduate School of Total Income Margin Management, Carrington College Business, Tech, – Highest operating margin, biggest segment 14.60 19.73% 359 25% Management  Healthcare and Nursing Medical/ – Ross University, Chamberlain College of Nursing, 5.58 7.54% 107 19% Healthcare American University, Carrington College – High growth in demand for nurses Professional, 1.64 22.2% 33 20% K12, International  Professional Training and K12 – Becker Professional Educator, Advanced Academics Totals (FY11) 21.82 29.49% 499 23%Source: FactSet Data, Company Data, http://www.aacn.nche.edu/media-relations/fact-sheets/nursing-shortage, DeVry Inc, 2011 10-K 3
    4. 4. Agenda  Introduction and Overview  Industry Analysis  Business Model and Revenue Streams  Investment Thesis  Valuation and Transaction Dynamics  Risk Analysis and Mitigation Steps  Conclusion
    5. 5. Industry Analysis Recent Revenue Development (in $M) Recent Revenue Growth Market Share by Revenue in 2011Revenue Growth Rates 2008 2009 2010 2011DeVry Inc 17% 34% 31% 14%Apollo Group 15% 26% 25% -4%Education Management 24% 19% 25% 15%Career Education -1% 11% 16% -10%Corinthian Colleges 17% 23% 35% 6%ITT Educational Services 17% 30% 21% -6%Bridgepoint Education 156% 108% 57% 31%Lincoln Educational Services 15% 47% 16% -20%Strayer Education 25% 29% 24% -1%Industry Average 16% 26% 26% 2%Source: 10-K fillings of competitors 5
    6. 6. Industry Analysis Valuations and Multiples of the Industry in 2011 EV/EBITD P/E EV/Sales EBIT Margin % Sales/Assets ADeVry 10.32 0.94 15.82 4.28 1.18Apollo 9.95 0.92 23.27 3.58 1.45Education Management 10.39 1.11 15.35 5.37 0.63Career Education 4.59 0.06 12.26 0.41 1.43Corinthian Colleges 12.47 0.27 3.18 3.77 1.55ITT Education Services 5.67 0.95 33.81 4.48 0.58Bridgepoint Education 8.07 1.05 29.33 3.51 1.52Lincoln Educational Services 7.22 0.36 8.83 2.58 1.41Strayer Education 11.14 1.83 28.55 5.98 2.71Industry Average 8.87 0.83 18.93 4.19 1.39 Key Takeaways  DeVry’s position and main weaknesses: – Valuation lags behind leaders such as Apollo and Strayer – Inefficient cost control; low EBIT margin – Underutilized resources; low Sales/Assets ratioSource: 10-K fillings of competitors 6
    7. 7. Agenda  Introduction and Overview  Industry Analysis  Business Model and Revenue Streams  Investment Thesis  Valuation and Transaction Dynamics  Risk Analysis and Mitigation Steps  Conclusion
    8. 8. Business Model Highlights 8
    9. 9. Growing Revenues and Predictable Cash Flows Revenue M&A  Stable growth in revenue and net income due  Fanor ($23.5M) – leading provider of private to organic growth and acquisitions post-secondary education in Brazil  Students are not likely to drop out due to  U.S. Education Corporation ($290M) – economic slowdowns provider of healthcare education through certificate/associate programs  But new student starts are influenced by economic slowdowns (i.e. improving  Advanced Academics ($27.5M) – leading unemployment rate would encourage provider of online secondary education enrollment) services Cash Flows Financial Highlights  DeVry generates stable operating cash flows   2008 2009 2010 2011  CFO has grown by 29% CAGR for past 3 Revenue 1,092 1,461 1,915 2,182 years while revenue has grown at 26% Growth - 33.8% 31.1% 13.9% CAGR Net Income 126 166 280 330 CFO 197 250 392 408  CFO consistently stands at 17-24% of assets Capex 63 74 131 136 CFO/Assets 19.4% 17.4% 24.1% 22.1%Source: FactSet Data, Company Data, http://www.aacn.nche.edu/media-relations/fact-sheets/nursing-shortage, DeVry Inc, 2011 10-K 9
    10. 10. Agenda  Introduction and Overview  Industry Analysis  Business Model and Revenue Streams  Investment Thesis  Valuation and Transaction Dynamics  Risk Analysis and Mitigation Steps  Conclusion
    11. 11. Investment Thesis 1. Increase Student Enrollment - Grow Revenue High fixed cost means high operating leverage – Each additional student can be served at a small incremental cost – Boost number of students to maximize usage of these fixed costs Differentiate curriculum – Design more programs focusing on fastest growing sectors such as nursing and healthcare – Involve employers in curriculum design and hire industry leaders and experts as instructors – Initiate study abroad-like program to better connect international students/consumers (these also tend to be higher margin programs) Enhance job placement results – Establish academia-industry alliances to match graduates and employers – Enhance career services and develop alumni networks to enhance job placement results. 11
    12. 12. Investment Thesis 2. Optimize Resource Utilization - Increase Sales / Assets Ratio  Provide discounts to encourage seasonally weak summer enrollment  Expand facilities and widen course offerings at campuses in key population centers  Consolidate and/or share suburban and rural campus space while also renting out unused capacity  Upgrade the facilities of Carrington Community College to make them suitable for use by DeVry’s high-margin postgraduate degree programs 3. Reduce Costs - Increase EBIT Margin & Lower SG&A  Integrate online course delivery system and admin functions across different brands to create synergies and reduce operating costs  Create a more universal marketing campaign which encompasses and links the various specialties Devry offers  Tighten credit check process upon student enrollment to lower student loan default rates and collection costs1. http://www.aacn.nche.edu/media-relations/fact-sheets/nursing-shortage2. DeVry Inc, 2011 10-K 12
    13. 13. Agenda  Introduction and Overview  Industry Analysis  Business Model and Revenue Streams  Investment Thesis  Valuation and Transaction Dynamics  Risk Analysis and Mitigation Steps  Conclusion
    14. 14. The Deal Structure Transaction Dynamics  Purchase price: $2.52B  Pay 30% premium over latest closing price ($44/share) to acquire company  30% Equity – $720M – Time frame: 3 – 6 months to close deal  70% Debt – $1.80B  Bring in new managers for cost cutting and – 70% Mezzanine paid over 5 years streamlining various divisions – 30% Senior paid over next 5 years  Exit via sale to strategic buyer after 5 years Assumptions Results  Average growth rate: 14 %  Valuation at exit: $5.50B  Debt/Equity: 2.33 (Post-LBO)  IRR: 22% (base case)  Borrowing costs: 7-9% interest rate  CoC: 3.5 years  Pre-LBO EV/EBITDA: 5.2  Total value to equity investors: $5.0B  Post-LBO EV/EBITDA: 5.2 (no expansion)Source: FactSet Data, Company Data, http://www.aacn.nche.edu/media-relations/fact-sheets/nursing-shortage, DeVry Inc, 2011 10-K 14
    15. 15. Unlocking Value COGS + SG&A is currently around 81% of revenue Our target is lower to (through the methods described in investment thesis) around 72-74% This improvement puts DeVry in line with current industry leaders High operating leverage business means it is essential to grow student volume Our belief is that we can at least sustain the current growth rate of 14% if not expand Improving domestic macro conditions and further international expansion will help drive top-line 15
    16. 16. Agenda  Introduction and Overview  Industry Analysis  Business Model and Revenue Streams  Investment Thesis  Valuation and Transaction Dynamics  Risk Analysis and Mitigation Steps  Conclusion
    17. 17. Key Risks and Mitigation SolutionsThe economy slows down, causing enrollment to drop further. Plan expansions carefully, based on projected population and economic growth in each region.Competition tightens, with competitors poaching current students. Differentiate on education quality, job placement results and branding. Strengthen online course delivery platform to enhance flexibility to students. Create student clubs and communities to form a bond among current students.The revenues do not offset the fixed costs. Consolidate IT systems, administration and careers services across member institutions. Sell off unprofitable and underused campuses. Negotiate lease termination.Difficulties encountered in post-acquisition integration Grow organically Carefully assess synergetic potential and cross-selling opportunities before making an acquisition. 17
    18. 18. Agenda  Introduction and Overview  Industry Analysis  Business Model and Revenue Streams  Investment Thesis  Valuation and Transaction Dynamics  Risk Analysis and Mitigation Steps  Conclusion
    19. 19. Education is good business.

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