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For-Profit Colleges Are Scrambling Ahead Of The Presidential Election

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For-Profit Colleges Are Scrambling Ahead Of The Presidential Election

Two big pieces of news hit the education market recently, both in the for-profit college sector.

On July 29, Strategic Education Inc (NASDAQ: STRA) bought schools and education programs operating in Australia and New Zealand from Laureate Education Inc (NASDAQ: LAUR) for $643 million in cash. The deal will bring a number of brands and an estimated 19,000 students into the Strategic bundle, which already include the for-profit, nearly entirely online colleges Strayer and Capella. With the acquisition, Strategic will have nearly 110,000 students paying, or getting grants and taking loans, to study with them.

On Aug. 3, Zovio Inc (NASDAQ: ZVO), formerly Bridgepoint Education, announced that one of its signature education properties, the online, for-profit Ashford University, would be “acquired” by the University of Arizona and become “The University of Arizona Global Campus.” The acquisition price was $1.

At one time, Ashford was among the largest online, for-profits. But like many schools in the sector, its enrollment has declined by about half to a, still significant, 34,000 students. In 2019 and 2020 Zovio began reducing staff and reported a net operating loss of more than $56 million for 2019. 

“Acquired” is in quotes because, even though most of the press reported the Ashford deal as a sale to Arizona, it was not. It’s more of an agreement to create a legally new entity, the “Global Campus” wherein Arizona would scoop up Ashford’s students, programs, teachers and marketing, rebrand everything as “University of Arizona,” and Zovio and the University of Arizona would share the proceeds by spitting student tuition income.

They may not seem it, but the Strategic Education deal in Australia and the Ashford/Arizona deal are probably related. Most observers agree they are coming at about the same time because the Presidential election is less than 90 days away, and if former Vice President Biden wins, it will likely be an awfully bad time to be in the for-profit college business.

Regulatory Seesaw

The fast backstory is that President Obama put new regulations on for-profit colleges, linking their ability to get federal money to their ability to prove that their graduates could get jobs. Obama also put the accrediting body for many for-profit colleges on a path to demise, choking their funding and their legal status. Many for-profits (ITT, Corinthian, ECA) closed and enrollments and profits plummeted sector-wide. But President Trump reversed both Obama policies—reinstating the accreditor and repealing the rule requiring schools to prove their degrees have career value. 

Biden, should he win, is expected to reinstate the Obama rules, if not go further. His campaign plans say, “The Biden Administration will require for-profits to first prove their value to the U.S. Department of Education before gaining eligibility for federal aid.” 

So, for-profit colleges that survived the impact of the Obama rules know what’s coming in a Biden win. They know it’s bad for them. Doing the math, they probably have eight, maybe 10 months before the regulations and restrictions and scrutiny kick in again. This should also serve as a warning to investors about the for-profit college sector overall. 

They Won't Go Down Without A Fight

If that’s right, and Zovio and Strategic see the hammer coming down again, they’ve chosen quite different paths to survival. 

Strategic, with its strong cash balance sheet, has picked up education properties beyond the reach of a Biden Department of Education. If Strayer and Capella suffer, they have diversified. That feels smart.  

But the Zovio/Ashford/Arizona deal is different. It’s what education observers call “brand washing,” the attempt to hide or change what type of school you are in hopes that regulations won’t apply to you. 

It’s a risky and unproven approach, but it’s not new. In one example, the for-profit Grand Canyon University (NASDAQ: LOPE) tried it. They created a non-profit, sold their school to it, then hired a for-profit company to run it. The catch is that the two companies are the same: the CEO of the for-profit “management” company and the President of the “non-profit” school are the same person. The IRS allowed this arrangement. The Trump Department of Education did not. 

In fact, Ashford tried a similar move—selling the school then hiring themselves to run it—before joining the University of Arizona. Again, the IRS was fine with it, but the Department of Education was not. 

In other words, legally speaking, moving from a private for-profit to something else is anything but certain, especially in a Biden administration, whose future education leaders are watching these maneuvers closely. 

Which brings us back to the Ashford deal with Arizona. This type of “we’re a new school” deal is not new either. It’s terribly similar, in terms and design, to the one announced a few years back between the public Purdue University and the for-profit Kaplan University. The pair created a new corporation “Purdue Global” and split the proceeds. Both deals are really like a brand rental, a white-label deal with Ashford renting the University of Arizona brand and Kaplan renting the Purdue nameplate, then sharing the sale. 

Either way, for investors, “proceed” splitting is an import word because there have been no profits. As of a year ago, the Purdue venture reported a loss of more than $38 million in their 2018 financials. And Graham Holdings (NYSE: GHC), the former owner of Kaplan University said that, “As of September 30, 2019, Kaplan had a total outstanding accounts receivable balance of $72.3 million from Purdue Global related to amounts due for reimbursements for services and a deferred service fee. In addition, Kaplan has a $20 million long-term receivable balance due from Purdue Global at September 30, 2019.”  

Even if becoming a new school works, if the Zovio deal to mingle Ashford with the University of Arizona follows the Purdue deal, it may not be financially successful. 

The bottom line is that, for for-profit colleges, their skies may be dark again very soon and there are two alternatives to potentially shelter from the storm: to get out of town, as Strategic Education has done, or to hide, as Ashford is doing. Hiding is very uncertain and has been unprofitable so far, which makes getting out of town seem like the strategic decision. 

 

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