1. Street Smart: Team Members
Akshay Gautam
Institute Name: Indian Institute of Management, Ahmedabad
Mobile Number: 9687043757
Email-ID: p10akshayg@iimahd.ernet.in
Vinay Kumar
Institute Name: Indian Institute of Management, Ahmedabad
Mobile Number: 7567757353
Email-ID: p10vinayk@iimahd.ernet.in
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2. Overview of the Indian Education Sector
Overview Key Players
Third largest education system globally, after China and the US, with Company Segments
one million schools and 18,000 higher education institutions
With a population of approximately 540 million in the 0-24 age College/School Test Preparation
K-12 Schools and Skill Schools
bracket, it is also the largest education market in the world
Largest services market in India with a market size of more than 450 Pre-School, K-12 Education
million students and USD 57 billion per annum (2009) Higher, Vocational Education
Opportunities in the Indian Education Sector: College Test Preparation
GoI willing to engage the private sector in the education sector, e-Learning Solutions
significant opportunities both in government and private schools
Pre-school, K-12 & Higher Education: 67% of the market & School Test Preparation
growing, but more competition leading to low margins K-12 Schools
Other high growth areas: Vocational, online and Test prep
segment having an estimated growth rate of between 15-60% Corporate Training solutions
annually Computer based learning
Key Drivers Recent Trends
Structural Urbanization and rising disposable income Private Sector
Changes Household spending on education grown
Growth in
Expenditure Enrolments (Mn)
rapidly, CAGR16.3% in 2002-08 to US$ 15.6 Bn
A sustained GDP growth increasing demand for
US$ Bn
40 38 235
skilled educated labour force in the economy 33 228
35 230
29 223
Favorable Projected to have the world’s largest population 225 219
30 25
Demographics under 20 years - 468 Mn in 2015, 40% higher 220
25 22 212
than China’s under 20 population at 318 Mn 215
Increasing focus on importance of education by 20 210
the rising middle class 15 205 200
200
Government Growing shift towards private education service 10 6 195
Regulations/ providers for increasing the quality & funding 5 190
Spending More segments being opened up for For-Profit 0 185
Allocation to the sector increased: FY plans
'01 '12 '13 '14 '15 '16 '03 '04 '05 '06 '07
Assuming USD/INR Exchange Rate of `45/$ 2
Source: CRISIL, Technopak, Venture Intelligence
3. Overview of Probit Limited
Overview Financials
Established in 1990, as a leading finishing school for the IT sector
` Crores 2011
Provides IT learning solutions for individuals, enterprises, schools
and colleges in India & globally across 40 countries 400 369 Revenues
Has diversified into school and corporate education services 272 10
300
Provides content directly to classrooms of schools and colleges using % 35
video conferencing 200 %
Growth Prospects: 58 55
100 55
The growing IT industry in India is driving IT education and 25 25 %
training market as well as enhanced teaching techniques 0
Given its reach, expand as an infrastructure provider to schools Gross PBT PAT
Risks: Revenue US Corporate
Perceived mainly as a software education provider Indian IT
Drop in IT hiring is perceived as a risk 2010 2011 Others
Finishing Schools Segment Avenues for Value Creation
The recent boom in the Indian economy has enhanced the need for
finishing schools as many people who graduate from tier-2 and tier-3 Diverse
colleges in India lack the requisite technical and communication skills Portfolio
for the job High
Comp.
US$ 150 Mn market Adv.
growth
IT finishing schools typically cover technical skills as well as segments
communication and problem solving skills required for the job Creating
The biggest advantage of these finishing schools is that these Value
schools cut down the "deployable time" for a company High
Tap Rural
Key Drivers: Profit
India
High demand for “soft skills” in the IT/BPO sector Margins
Outcome-based learning translates to “job-ready” students Achieve
Large firms have invested, but smaller firms lack infrastructure Scale
Some institutes have 100% job guarantees from the Indian Govt.
Source: CLSA, Annual Reports, News Runs. 3
4. Potential Acquisition Targets in the Sector
Future Education Novell Education Solutions
Business: Business:
K-12 Education Schools, Online Tutoring & Teacher Training Computer Education in Schools & Colleges, eyeing K-12 Market
Strengths/Opportunities: Strengths/Opportunities:
Present in the entire value chain of Primary Education, largest Knowhow of state of the art technologies to deliver digital
player in the Indian Education Sector & a global experience content, a competitive edge to leverage upon in the future
Strong foothold on the government school ICT projects Ability to reach the remotest corner using the technology
Rise in Broadband usage to increase Online Tutoring business Economies of Scale benefits as number of centers increased
Risks/Weaknesses: Risks/Weaknesses:
K-12 sector highly competitive and prone to new regulations Revenue Concentration – 67% revenues from ICT projects
40% revenue seasonal, strong dependence on a single source Operating Risks – maintenance of hardware across geographies
Growth Plans: Operating Leverage – growth in centers to ensure profitability
Adding around 160 schools, increasing online tutoring subscribers Growth Plans:
by 9 times by FY 2014 1000 centers by FY 2014, up from 200 currently in operation
Premium Coaching Financials
Business:
Prep Courses/Coaching Classes for IITJEE/MBA Entrance, etc. 273
` Crores
300
New entrant in main stream educational field: Chain of Play
250
schools – Khushi, K-12 schools & higher education institutes
Strengths/Opportunities: 200 169
Instructor based as well as Web based services capability 150
Leaders in one of the high growth segment of the sector 100
100 82
Adequate funding to expand – INR 50 cr from a Private Equity 65
47
Risks/Weaknesses: 50 11 NA NA
Revenue Concentration – 72% revenues from MBA test prep 0
Might lose focus on core business as a result of rapid expansion Future Education Novell Education Premium
Growth Plans: Coaching
240 coaching centers by FY 2013, up from 140 currently Gross Revenue PAT NW
Entering into K-12 schools & play schools in the informal space
Source: CLSA, Annual Reports, News Runs. 3
5. Rationale For Acquisition
Rationale for acquiring Premium Coaching
Enter a high growth segment: Presence in Test Preparation Diversification: Entering high growth segments such as Test-Prep
Segment which is growing at a rapid pace of 20% CAGR and marginally profitable segments such as K-12 allows Probit to
Close to 4,00,000 students take IIT JEE and 2,30,000 students diversify its revenues away from providing IT skills education
take CAT every year Business in the US corporate training market is susceptible to
Synergies: discretionary spending cuts
Revenue enhancement: By deploying its school ICT education Current business is also susceptible to growth in Domestic IT
infrastructure in K-12 schools currently being run by Premium Industry – drop in hiring can result in slowdown
Coaching, it can gain additional revenue As margins in getting content within the classroom are higher
Cost reduction: Sharing infrastructure with schools being run because of lower infrastructure requirements, Probit gets an
by Premium Coaching and lower teacher requirements in Tier II opportunity to bid aggressively in the ICT school education space
and Tier III cities in India through ICT learning Long term plans in-line with each other: Premium Coaching
Continuing Synergies: As Premium expands K-12 schools, also runs K-12 school and an MBA school, while Probit has already
Probit will reap the benefits in the long run started providing IT education in Schools and colleges
Target Play School K-12 Test Prep Colleges School ICT IT Training Rank
Size US$300 Mn US$20 Bn US$2 Bn US$7 Bn US$1 Bn US$ 150Mn
CAGR 18% 14% 20% 17% 10% 14%
Regulation Medium Medium Low High Low Low
Probit
Limited
Future
Education 3
Novell
Education 2
Premium
Coaching 1
Source: CLSA, Annual Reports, News Runs. 5
6. The acquisition process: Going Forward
Information Valuation Model
Buy Side – Probit Limited Discounted Cash Flow Analysis
Financial Statements Discount FCFF of Premium Coaching at its WACC
Management’s view about strategy going forward and potential Transaction Comparables Method
synergies with the target firm Estimate EV/EBITDA multiple based on recent transactions in the
Indian Education Sector
Discuss acquisition process with management
Multiply with EBITDA of Premium Coaching
Trading Comparables Method
Sell Side – Premium Coaching
Estimate EV/EBITDA multiple based on currently trading
Financial Statements to arrive at Free cash flow to Firm
comparable stocks – NIIT, Aptech and Everonn
Pro-Forma financial statements and business plan for the next 5 Multiply with EBITDA of Premium Coaching
years for different segments Sum of the Parts Valuation (SOTP)
Discuss Buyer firm’s strategy and business plan with Sell side Value each segment of Premium Coaching Separately and sum up
management to arrive at a consensus opinion Different growth segments and management plans
Due diligence report Arrive at an upper and lower bound for Premium Coaching
Proposed Timeline to finalize the acquisition
Confidentiality & Letter of Intent and Due Diligence and Disclosures & Closing The
termination agreement Term Sheet Definitive Agreement Informing the target Transaction
1. Agree on price and form 1. When both firms broadly 1. The agreement binds the shareholders 1. The M&A agreement
of payment two parties to 1. Material and probable
2. Commit to confidentiality agree to terms of a deal commits the two firms to
consummate a transaction decisions must be made
and exclusivity 2. Helps to confirm the 2. Due diligence involves in- public to shareholders conclude a transaction
3. CEOs of both Probit and growing level of depth research at the 2. Target shareholder vote 2. Payment is made and
Premium brief their commitment and guide target company is required through a ownership is assumed by
respective boards about the lawyers in drafting a 3. The agreement requires proxy Probit Limited.
negotiations Definitive Agreement an affirmative vote by
Target’s board
Oct 3, 2011 Oct 15, 2011 Nov 3, 2011 Dec 3, 2011 Jan 2, 2012
Source: Applied Mergers and Acquisitions, Bruner 6
7. Hector Capital:
Strong Commitment to Indian Education Sector
The Hector Capital Group, Inc. is a leading global investment banking, securities and investment management firm.
We provide a wide range of financial services to a substantial and diversified client base that includes corporations,
financial institutions, governments and high-net-worth individuals. Founded in 1978, the firm is headquartered in
Mumbai and maintains offices in all major financial centers around the world
Akshay Gautam Vinay Kumar
Head, India Investment Banking MD, India Investment Banking
TMT & Education Banker TMT & Education Banker
Over 15 years of experience across TMT & Over 12 years of experience in the
Education sector in India and HK Education & TMT sectors across US & India
Pitched Everonn Education for its 2007 IPO Advised Gaja Capital to invest in CL
Advised Matrix Partners to invest US$ 200 Advised Educomp to buy 67% stake in Vidya
Mn in FIITJEE in 2009 Mandir Classes
Recent Deals in the Indian Education Sector
2010: Advised Educomp 2008: Advised Everonn 2007: Advised Gaja 2010: Advised Aptech‘s 2007: Lead Bookrunner
to acquire 67% stake in Systems to acquire Bihar Capital to invest US$ buyout of Maya Academy for US$ 100Mn IPO.
VMC for US$ 7.4 Mn based Toppers Tutorials 8.25 Mn in Career of Advanced Cinematics 131 x oversubscribed
Launcher for US$ 150 Mn
2010: Advised Franklin 2008: Advised Educomp 2009: Advised Matrix 2011: Advised NIIT to 2009: Lead Bookrunner
Templeton PE to invest to acquire 50% stake in Partners to invest US$ acquire Madrid based IT for US$ 5Mn IPO.
US$ 100 Mn in Career Euro Kids US$ 8.5 Mn 200 Mn in FIITJEE Firm Proyecta 1.3x oversubscribed
Point
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