Stadio coughs up for CA Connect
Stadio coughs up for CA Connect
Published Date: 2021-06-04 | Source: INCE|Community | Author: The Finance Ghost
Stadio is the business that was spun out of Curro to focus on acquisitive growth in the tertiary education sector.
It faces completely different fundamentals to the business that incubated it, with Curro operating a capital-intensive expansion model and facing the pinch of a middle-class South Africa that is struggling to stay afloat. Stadio, on the other hand, owns businesses that offer niche education and training opportunities. In many cases, these can be delivered online.
This is a good place to play in the modern world.
In April 2018, Stadio acquired CA Connect via its subsidiary Milpark Education. CA Connect offers a post graduate diploma in accounting, or a PGDA, which is the qualification of choice for masochists and those who don't want to see their friends for twelve months.
Believe me, I've been there.
The PGDA is the final academic step for students looking to qualify as SAICA-accredited Chartered Accountants. CA(SA) still carries a lot of weight in this country and is an exceptional business qualification, so demand for those four letters is strong.
In my view, CA Connect is doing well because offering the PGDA online is on-trend with the push towards flexibility that is a feature of today's working environment. We are working remotely, so why not study remotely?
Also, when you are trying to finish a tough qualification and move on with your life, do you really want your exams disrupted by fee protests? Nobody enjoys that and many simply refuse to take the risk, especially older students and those putting themselves through varsity while working.
I believe that tertiary education is going to change significantly in the next decade. Stadio is well-placed to take advantage of that.
As is common in acquisitions, the CA Connect deal was structured with an earn-out. This means that the final price is variable based on how the business performs over an agreed period, in this case three years.
The business is shooting the lights out, with enrolments and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation, also known as operating profit) exceeding expectations. This has caused large fair value adjustments in the earnings of Stadio. To align the CA Connect management team with Milpark and to remove volatility in the accounting, Stadio and the sellers of CA Connect have agreed to an early settlement.
In other words, the sellers of the business are laughing all the way to the bank.
In addition to the R57.2m that has already been paid for the business (R18.7m in cash and R38.5m in Stadio shares), a further R201m will be forked out by Stadio for the business over the next year in two separate payments. Half of this amount will be settled in cash and the other half in shares, split across Stadio and Milpark shares.
When companies talk about using their shares as "acquisition currency", this situation is what they are describing. Shares can be issued to sellers of businesses in order to pay for acquisitions.
When all is said and done, the CA Connect management team will own 18.7% of Milpark and will focus on growing the Milpark business based on their success with CA Connect.
CA Connect generated profit after tax of R23.8m in FY20. The final acquisition price is R258m, a P/E ratio of 10.8x which is high for a private company. At least the founders are teaching the CA(SA)s of tomorrow, so it seems those students are in good hands.