Cognita and its owner have approached Partners Group around a takeover of its portfolio company International Schools Partnership (ISP) – and would consider floating a joined-up business in due course, EducationInvestor Global can reveal.
This publication has learnt from six sources that the international schooling giant and its majority shareholder, Jacobs Holding, the Swiss family office, have sought to spark a dialogue with Swiss private equity house Partners Group about a potential acquisition of ISP.
According to several sources familiar with Jacobs Holding’s thinking, the group has also floated the idea of publicly listing the entity that would be formed by a mega-merger between Cognita and ISP.
An initial public offering of what would be the world’s largest private school operator with more than 120 institutions would take months – if not years – to formulate, however, and would be highly unlikely to occur in 2021, if at all.
An IPO of a multibillion-dollar school operator would also be fraught with risk. Nord Anglia, one of Cognita’s largest competitors, lasted less than three years on New York’s stock exchange before it was taken private by its former owner Baring Private Equity Asia, which floated the company, and a Canadian pension fund.
A listing would be contingent on a successful takeover and integration of ISP by Cognita, which is by no means guaranteed to come to fruition.
Andrew Deakin, managing director, Partners Group, who sits on the board of ISP, is “unenthusiastic” about the prospect of an off-market sale to Cognita, despite “several” attempts by the latter to initiate formal takeover talks, according to a well-placed source.
Partners Group, which has been invested in ISP since it launched in 2013, is keeping its options open by planning for a number of scenarios.
After approaching a number of long-term funds and banks earlier this year about selling all or part of its stake in ISP, Partners Group hatched a plan to internally transfer ownership of the business to a new fund operated by the buyout group, it is understood.
Private equity investment terms stipulate that stakes in companies must be sold within a fixed time-frame of an initial investment, under what is known as a fund’s ‘lifespan’. By transferring a stakeholding into a new fund with a fresh lifespan, a private equity firm can essentially extend a holding period by removing the original obligation to exit a position.
This publication understands that Partners Group had hired lawyers from Clyde & Co and Sidley Austin to help it orchestrate a transition of its majority stake in ISP from a fund approaching the end of its lifespan to a newer vehicle. (Sidley Austin had not responded to a request for comment at the time of publication; Clyde & Co declined to comment.)
However, it is understood that Partners Group is now leaning towards a competitive auction of ISP that could launch in the first quarter of next year and culminate in the sale of a controlling stake worth billions of euros.
Jacobs Holding – which is headquartered in Zurich, just 20km from Baar, where Partners Group is based – has signalled interest in doing an off-market deal that would pre-empt a formal auction.
But this would almost certainly result in a dichotomy between Jacobs Holding and Partners Group on the value of ISP, which operates more than 46 schools in around a dozen countries and this month announced the acquisition of two school groups in Toronto, Canada.
EducationInvestor Global reported in September that Partners Group was inclined to relinquish full control of ISP but only in exchange for €2 billion, equal to 20-times the group’s forecasted earnings of €100 million.
Jacobs Holding famously paid £2 billion for Cognita in September 2018 in a deal which, at the time, valued the premium private school operator at around 26-times its annual earnings.
There are also questions around how a takeover of ISP by Cognita would be financed.
Cognita, according to ratings agency Moody’s, is highly leveraged – with an adjusted debt-to-EBITDA ratio of more than 10 – and the group’s earnings have been impacted by the global coronavirus pandemic. Moody’s downgraded Cognita’s corporate family rating in November to reflect its view that “adjusted free cash flow generation is expected to be negative until fiscal 2022 at the earliest”.
Less than six months after Jacobs Holding acquired Cognita from KKR and Bregal Investments, in January 2019 it sold a significant minority stake in the company to private equity firm BDT Capital Partners and Sofina, a French family office.
That same month, Cognita entered into a €255 million second lien term loan agreement – a large chunk of which was financed by EQT Credit – and used all of these funds to repay other loans, according to the company’s 2019 strategic report.
Cognita’s management team, led by chief executive Chris Jansen, and Jacobs Holding are understood to see in ISP an opportunity to boost the latter’s margins by exploiting synergies and economies of scale in countries where both groups operate schools.
Some market commentators suggested that the firms’ portfolios, if joined together, could be complementary. Most of Cognita’s 78 schools are priced at the ‘premium’ level, while many of ISP’s institutions target the mid-market segment.
One banker said: “A merger to create a diversified schools group with, say, a £4 billion market cap would make a ton of sense.”
Others did not see the logic so clearly. Another investment banker said: “While a deal would help Cognita become more diversified and international, and provide liquidity to Partners Group, it would not solve both groups’ problems. There would still be issues regarding consistency of quality across the merged estate.”
This sentiment was echoed by another investment banker, who said: “There has always been a question around cultural fit. Cognita, as a premium provider, has always looked down on ISP as the more affordable – i.e. non-premium – provider.
“So, Cognita has always been a bit sniffy about the valuation it would attribute to ISP – as in, it would be valued lower than Partners expects.”
Asked to comment on the veracity of information contained in this article, a spokesperson for Partners Group said: “We do not wish to comment at this time.”
A spokesperson for Cognita said: “We do not comment on market speculation or rumours.”
Jacobs Holding did not respond to a request for comment.
Date published: 9 December 2020