DeVry Buys U.S. Education Corp.

NEW YORK (Reuters) – DeVry Inc (DV.N: Quote, Profile, Research) announced on Wednesday the purchase of closely-held U.S. Education Corporation for $290 million to expand its presence in health care education.

DeVry, based in Oakbrook Terrace, Illinois, said the acquisition will be neutral to a penny dilutive in 2009 and between 7 cents and 10 cents per share accretive in 2010.

It will finance the deal, projected to close in September, with a combination of cash and debt, DeVry Chief Executive Daniel Hamburger told Reuters in an interview.

Integration planning has started and the company expects to seek Department of Education approval now that it has announced the deal. No jobs will be cut, Hamburger said.

For two years, DeVry has been talking about buying a school specializing in qualifications for jobs that support doctors, dentists or nurses to expand its offerings in health care and in degrees and certificates taking two years or less.

Medical education, including degrees for doctors, veterinarians and nurses, accounts for 14.7 percent of its revenue.

“With the close of this deal, we have one of the largest platforms of anybody in the biggest need area in the world of education,” Hamburger said.

U.S. Education, headquartered in Mission Viejo, California, has two schools, Apollo College (not affiliated with Apollo Group Inc (APOL.O: Quote, Profile, Research)) and Western Career College, about 8,700 students and 17 campuses.

The price tag equates to a little over 11 times earnings before interest, taxes, depreciation and amortization — a measure of cash flow.

“We're not saying we're getting a bargain. That's a fair price. You pay for growth and profitability,” Hamburger said.

In 2008, U.S. Education's estimated operating income grew to $19.5 million from $11.8 million, while its estimated revenue grew 24 percent to $144 million in the same period.

DeVry plans to expand U.S. Education, which will retain its brand, by opening at least one new campus a year starting next year and by adding online offerings, Hamburger said.

The company also sees more health care education acquisitions in its future.

CREDIT CONCERNS

Analysts began to question DeVry's plan to buy a school offering shorter programs as the credit crunch spread, causing banks to exit student lending and raising concerns that fewer lenders would hurt enrollment.

“While we believe an allied health school could be a strong strategic fit, it would also likely come with the need to underwrite additional subprime loans that could spook DeVry's multiple in the near term and depress the company's margin,” Signal Hill analyst Trace Urdan wrote in a note in May.

BMO Capital Markets analyst Jeff Silber said such an acquisition could be risky due to its “potentially lower quality student base.”

Hamburger said a shorter degree program was not riskier.

“It's not a question of long and short, it's question of value and return on educational investment,” he said.

At U.S. Education, private loans account for about 12 percent of revenue compared with about 5 percent of DeVry's.

DeVry considers that an acceptable level and does not see the need to lower it, especially given U.S. Education's ability to grow enrollment through the credit crunch.

Between 2006 and 2008, U.S. Education's enrollment is up 35.6 percent to an estimated 8,745 students.

Western's student loan default rate is 10 percent; Apollo's is 5 percent. The average for two-year schools is 9.5 percent, Hamburger said.

Despite his concerns about an acquisition such as U.S. Education, Urdan rates DeVry shares a “buy.” Silber rates them “outperform.”

They trade at 30 times next year's estimated earnings and at a discount to rivals such as Universal Technical Institute Inc (UTI.N: Quote, Profile, Research) Corinthian Colleges Inc (COCO.O: Quote, Profile, Research) Strayer Education Inc (STRA.O: Quote, Profile, Research).

DeVry shares are up about 8.2 percent for the year, far outpacing the broader market Standard & Poor's 500 index, which is down about 13.5 percent.

They were up nearly 2 percent at $56.70 in late afternoon trading on the New York Stock Exchange.

By Helen Chernikoff

 (Editing by Andre Grenon)