There have been rumours floating the market after a news report said that Varkey Group & the Birla Group are in talks to acquire Educomp Solutions' K-12 business subsidiary. Educomp Solutions owns 75-80% stake in that subsidiary, while the rest is held by Educomp's promoter Shantanu Prakash. The News report published by Times of India/ET in the month of September mentioned that the Buyers are valuing the business at about $250 million, including the debt of about $150 million. That means the Equity will be valued at about $100 million.
If this News Report does turn out to be true along with the valuation numbers, then Educomp Solutions will receive about $75-80 million for it's stake, i.e. about Rs.450 to 500 crores. Shantanu Prakash will receive about Rs.120 to 150 crores for his stake. First lets look at the positives: Firstly, Educomp's Consolidated Long Term Debt of about Rs.3200 crores (at the end of Sept.'14) will reduce by about Rs.1000 crores, which is the K-12 subsidiary's debt. The Rs.450-500 crores that Educomp Solutions will receive for it's stake will further help reduce it's own debt or a part of the Cash could be used to fund expanding it's core business of SmartClass & other such products like SmartClass Tab, English Mentor, etc. More than the company, the promoter Mr. Shantanu Prakash might be more keen on encashing his stake as the Cash he receives can help him fulfil his commitments towards the CDR scheme. Last month, the company had announced that the promoter had pumped in about Rs.30 crores in the company, but I am sure that he needs to bring in more funds. All-in-all if the deal does go through in the expected manner, then it will help improve Educomp's existing Cash position as well as help improve the future Cash Flows as the Interest Cost could reduce by 30-40%.
Coming to the Negatives: Educomp will be exiting a business which has big potential at a distress-sale like valuations. The buyer knows that Educomp is in dire need of funds and hence is negotiating hard to pull down the valuations. We all know that the K-12 Schools business has HUGE potential, but Educomp will need much more funds to expand this business and bear losses in the initial years until the schools mature. And unfortunately, Educomp currently does not have that capacity.
What could be best is that Educomp brings in an Investor by selling only part of it's stake and Mr. Prakash selling his entire stake. Educomp could continue holding something like 49% or atleast 26% stake in that business. The money that the new Investor brings in could help the K-12 subsidiary get back to growth ways. If Educomp does exit completely, I am sure there will be non-compete agreement too signed where Educomp will be barred from re-entering the K-12 business for a period of atleast 5 years or so. That too will be OK as Educomp can use these 5 years to get back to strong profitability and a strong Balance-sheet position and then look at re-entering the K-12 schools business in a measured way.
Either way you look at it, there are more positives in this deal than negatives.
If this News Report does turn out to be true along with the valuation numbers, then Educomp Solutions will receive about $75-80 million for it's stake, i.e. about Rs.450 to 500 crores. Shantanu Prakash will receive about Rs.120 to 150 crores for his stake. First lets look at the positives: Firstly, Educomp's Consolidated Long Term Debt of about Rs.3200 crores (at the end of Sept.'14) will reduce by about Rs.1000 crores, which is the K-12 subsidiary's debt. The Rs.450-500 crores that Educomp Solutions will receive for it's stake will further help reduce it's own debt or a part of the Cash could be used to fund expanding it's core business of SmartClass & other such products like SmartClass Tab, English Mentor, etc. More than the company, the promoter Mr. Shantanu Prakash might be more keen on encashing his stake as the Cash he receives can help him fulfil his commitments towards the CDR scheme. Last month, the company had announced that the promoter had pumped in about Rs.30 crores in the company, but I am sure that he needs to bring in more funds. All-in-all if the deal does go through in the expected manner, then it will help improve Educomp's existing Cash position as well as help improve the future Cash Flows as the Interest Cost could reduce by 30-40%.
Coming to the Negatives: Educomp will be exiting a business which has big potential at a distress-sale like valuations. The buyer knows that Educomp is in dire need of funds and hence is negotiating hard to pull down the valuations. We all know that the K-12 Schools business has HUGE potential, but Educomp will need much more funds to expand this business and bear losses in the initial years until the schools mature. And unfortunately, Educomp currently does not have that capacity.
What could be best is that Educomp brings in an Investor by selling only part of it's stake and Mr. Prakash selling his entire stake. Educomp could continue holding something like 49% or atleast 26% stake in that business. The money that the new Investor brings in could help the K-12 subsidiary get back to growth ways. If Educomp does exit completely, I am sure there will be non-compete agreement too signed where Educomp will be barred from re-entering the K-12 business for a period of atleast 5 years or so. That too will be OK as Educomp can use these 5 years to get back to strong profitability and a strong Balance-sheet position and then look at re-entering the K-12 schools business in a measured way.
Either way you look at it, there are more positives in this deal than negatives.
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