Pearson announced last week that it will acquire Beijing-based English language test preparation service provider Global Education and Technology Group (NASDAQ:GEDU) at a $155 million enterprise value. With over 800,000 course enrollments during the past twelve months and 450 learning centers across 60 cities, Global Education is one of the leading test preparation providers in China. It has an additional one million registered users on its online course content delivery platform. Global Education focuses primarily on providing preparation products and services for secondary school English language learning (ELL) students taking high-stakes English language assessments for entrance into foreign universities; it has diversified its offerings beyond ELL test-prep products to include after-school tutoring and coursework and career consulting that can apply to the entire educational lifecycle. It has also expanded into K-12 services for primary level students and into professional certification test preparation services.
At a stated equity value of $294 million and an enterprise value of $155 million, the Global Education acquisition represents a 2.4x multiple on 2011E revenue and a 24.6x multiple on 2011E EBITDA based on consensus estimates. According to Global Education’s management, the deal represents a 105% share price premium over the pre-announcement closing price. The deal is expected to close during the fourth quarter of this year.
For Pearson, the Global Education learning center network will allow it to greatly expand its presence in the Chinese ELL market from eight cities to 60, building off the foothold it initially gained through its August 2010 acquisition of Wall Street Institute, a transaction in which Signal Hill served as an exclusive financial advisor. Pearson estimates that over 500,000 Chinese students take high-stakes English language exams each year, representing a four-fold increase over the last five years. Bloomberg reports that the number of Chinese students studying at U.S. colleges and universities grew 23% to over 157,000 students in 2011, the most of any foreign country.
With countless individual test preparation service providers competing in each major city, the related test preparation market and the general K-12 tutoring market in China remains a fragmented space with no one player controlling more than 1% market share. Potentially large swaths of market share could be up for grabs nationally through aggressive consolidation and expansion by deep-pocketed market leaders. Armed with deep resources, a commitment to growing its Chinese market and the existing Global Education geographic reach, Pearson is positioned to dominate the ELL test preparation space and could consider a move in the future to challenge New Oriental Education and Technology Services (NYSE:EDU) in the traditional college entrance exam test preparation space. Going forward, New Oriental will also be expanding rapidly and represents the biggest competitive threat to Pearson and Global Education’s growth strategy.
This deal marks Pearson’s twelfth acquisition in the past eighteen months and adds yet another notable K-12 related transaction to its 2011 activity. In September, Pearson made a $400 million acquisition of Connections Education, a provider of virtual education services for non-traditional K-12 students. It acquired Schoolnet, a provider of data-driven web-based solutions for school districts, for $230 million in April and took a majority stake in TutorVista, an Indian online tutoring provider, at a $215 million enterprise value in January.
-Justin Chang, Financial Analyst, and Chas Cook, Associate