Chinese firms eye U.S.-based Learning Care valued at up to $1.6 billion, say sources: Reuters

Chinese suitors have indicated their interest in buying U.S. child care provider Learning Care Group (LCG) that has been put on the block by its private equity owner and could fetch up to $1.6 billion, said people with knowledge of the matter.

The second largest for-profit early education and care provider in North America has drawn interest from venture capital firm IDG Capital and Bright Scholar Education Holdings (BEDU.N), which is backed by property tycoon Yeung Kwok-keung, said one of the people.

Buyout firm American Securities LLC, which controls Michigan-headquartered LCG, has hired Morgan Stanley as an adviser for the divestment of its stake, two of the people told Reuters, adding the second round of bids are due in mid-November.

A successful bid for the asset would help a Chinese buyer take the brand back home and tap into the booming demand for early education and child care services in the world’s second-largest economy, said one of the people.

While a source said IDG had participated in the first round of bidding, it was not known if Bright Scholar too had already submitted a bid. It was not immediately clear if there are other suitors in the fray or what level of regulatory scrutiny a Chinese bid may attract.

American Securities, IDG and Morgan Stanley declined to comment. LCG and Bright Scholar did not respond to requests for comment.

Chinese firms’ interest in LCG comes against the backdrop of a sharp rise in birth rates tied to the end of the country’s decade-long controversial one-child policy in 2015, as well as growth of urbanization and an affluent middle class.

China’s education market catering for children from nursery to end of secondary school will grow 8 percent annually to become a 3 trillion yuan ($451.50 billion) business by 2020, according to Morgan Stanley.

To benefit from that growth, companies in China are looking to snap up leading learning brands overseas to make Western-style education accessible to the children of the rapidly growing ranks of affluent parents.

LCG, a provider of care services to children aged between six weeks and 12 years, is likely to be valued at around 10-12 times its expected 2018 core earnings of about $130 million, said one of the people.

The deal terms for LCG are not yet finalized and there is no certainty that the two Chinese companies would participate in any further bidding rounds, said the people, who declined to be identified because the talks are private.

IDG Capital manages more than 10 funds and has assets under management estimated at over $7 billion. Its portfolio companies include Meitu Inc, a mobile hardware and app maker, and internet search provider Baidu Inc (BIDU.O).

Founded in 1994 with backing from Yeung, chairman of Chinese property developer Country Garden Holdings (2007.HK), Bright Scholar went public in New York in May and currently operates more than 50 international and bilingual schools across China.

Fifty-year-old LCG operates more than 900 schools mainly in the United States, and has the capacity to serve about 130,000 children, according to its website.

“There will be a lot of room for LCG to expand its business in China, where the demand for high-quality schools and educational services is growing rapidly,” said one of the people.

American Securities bought LCG from Morgan Stanley’s private equity unit in 2014.

Financial terms of that deal were not disclosed, but sources told Reuters at the time that the deal valued LCG significantly higher than the $700 million valuation that Morgan Stanley had assigned on the company in 2008.

According to Moody’s Investors Service Inc, LCG generated $25 million to $40 million of free cash flow per year over the last few years, and $864 million of revenue in the 12 months ending in March.