July 2, 2018 / 2:33 PM / 9 months ago

CORRECTED-DEALTALK-Brazil's Lemann in vanguard of private school asset scramble

(Corrects 19th paragraph to show age of Joao Carlos Di Genio is 79, not 75)

By Tatiana Bautzer and Carolina Mandl

SAO PAULO, July 2 (Reuters) - Five years ago Jorge Paulo Lemann, the financial wizard who engineered consumer conglomerates like Anheuser Busch Inbev and Kraft Heinz Co, veered into uncharted territory, backing a venture to create a network of K-through-12 schools in his native Brazil.

The result was Eleva Educação SA, which now has 53,000 students spread across five states and last year sold a 25 percent stake to private equity firm Warburg Pincus, which valued the firm at 1.3 billion reais ($335.71 million), according to a source with knowledge of the matter.

The education bets by Lemann and Warburg underscore a sea change in how investors are playing the education market in Latin America’s largest economy, where private primary school chains bolstered by a quest for alternatives to threadbare public schools are replacing for-profit universities as the smart-money bet.

Piero Minardi, a partner at Warburg Pincus who is helping to oversee the Eleva investment, sees the potential to double Eleva’s size every three years. Targeting different income classes, Eleva has units that charge tuition of up to 48,000 reais a year.

“Private school is aspirational for Brazilian parents,” Minardi says.

The poor quality of Brazil’s schools, ranked below an average of 72 countries graded by the OECD’s Program for International Students Assessment, is fueling 100 billion reais in spending on private schools annually, double what is spent on college and university tuition.

The scramble for those outlays is attracting for-profit university operators like Kroton Educacional SA, which agreed in April to pay 4.6 billion reais to buy 73 percent of Somos Educação SA.

That represented a 66 percent premium over where Somos, the country’s only listed high school and elementary school operator, traded before the deal - roughly double Kroton’s own valuation of 8 times earnings before interest, tax, depreciation and amortization (EBITDA).


The lack of targets with adequate scale beyond Somos is forcing other acquirers to snap up schools or grow organically. Brazil has around 38,000 private schools.

Unlisted Grupo SEB, run by Chaim Zaher, former owner of a 12 percent stake in Kroton rival Estacio Participações SA , has spent 300 million reais ($79.67 million) on targets including 110 franchisees of Canadian-run bilingual school chain Maple Bear. But he plans to focus on organic growth over the coming months.

“I just gave up on acquisitions now, schools got too expensive,” Zaher said recently in an interview.

Cognita Ltd, a UK-based education chain owned by KKR & Co LP and EMK Capital LLP, is trying to sell two schools in Brazil for the equivalent of 22 times their schools’ EBITDA, an even richer multiple than the 15 times Somos commanded, according to two people with knowledge of the matter.

Goldman Sachs & Co and the investment banking unit of Barclays, which are running the process globally as part of a wider effort to sell all or parts of Cognita, has yet to find buyers for the schools, the people said.

Cognita and Goldman declined to comment. Barclays did not immediately reply to requests for comment.


Some Brazilian basic education providers are pursuing capital market transactions to get financing, rather than selling control of the companies.

Software developer and schools operator Grupo Positivo, for example, plans an initial public offering of its education unit for next year, Reuters reported this month. The same group owns another listed company, Positivo Tecnologia SA .

Arco Educação, which sells software and learning materials to 1,300 schools, with 415,000 students, hopes to float its shares in New York later this year, one source said. Buyout firm General Atlantic LLC is among Arco’s shareholders.

But the largest player in Brazilian private schools, Colegio Objetivo, with 400,000 students, has declined to even talk to prospective new partners.

Its founder, 79-year-old Joao Carlos Di Genio, has rebuffed investors seeking to buy a stake, according to three people with knowledge of the matter, and has not yet decided whether to pursue an initial public offering. Objetivo has almost ten times the number of students that Somos had before the acquisition by Kroton. Objetivo declined to comment.

After snapping up Somos, the most coveted target in the basic education space, Kroton expects to focus on smaller acquisitions and organic growth. The company now owns 44 schools with 37,000 students.

Mario Ghio, who heads Kroton’s school division, says the company will now ramp up spending on after-school activities, often an alternative for parents unable to pay for an expensive private school. “We may offer foreign languages, coding or math courses,” he said in an interview. ($1 = 3.8724 reais)

Reporting by Tatiana Bautzer; Editing by Christian Plumb and Susan Thomas

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