EDITOR’S UPDATE: Kroton, Brazil’s largest for-profit education firm, received regulatory approval to acquire a controlling stake in Somos Educação for US$1.34b, providing an exit to Tarpon.

In 2017 Somos Educação acquired AppProva, generating a net IRR of 51% for AppProva investor e.Bricks Ventures, and acquired Stoodi for a reported R$15m.   (Source: Valor Economico)

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Brazilian for-profit education firm Kroton Educacional SA has agreed to purchase a controlling stake in rival Somos Educação SA from Tarpon Investimentos for US$1.34b.

(Reuters) Brazil’s largest for-profit education firm, Kroton Educacional SA (KROT3.SA) has agreed to buy a controlling stake in rival Somos Educação SA (SEDU3.SA) for 4.6 billion reais ($1.34 billion) to increase basic education business.

After acquiring a 73 percent stake in Somos from controlling shareholder Tarpon Investimentos SA (TRPN3.SA), Kroton will make a tender offer to minority shareholders and the deal value may reach 6.3 billion reais ($1.83 billion) if the offer is fully taken up, it said in a regulatory filing on Monday.

The deal will raise Kroton’s revenue by 30 percent, Chief Executive Officer Rodrigo Galindo told analysts in a conference call.

Kroton agreed to pay 23.75 reais per share, a 66 percent premium on Somos’ Friday closing price. Somos shares were up 49 percent in early afternoon trading in Sao Paulo.

Acquiring Somos, the only listed education company focused on basic education, allows Kroton to keep ahead of for-profit listed education companies that have been trying to invest more in schools than universities.

Kroton’s first acquisition in the segment was the purchase of Centro Educacional Leonardo Da Vinci earlier this month. After buying Somos, basic education would represent 27 percent of Kroton’s revenue, up from 3 percent without it, Galindo said.

Basic schools are less dependent on the government-funded education loans programs that fund university education and have been targeted by government measures to curb public deficit.

Galindo said Kroton will use debt to fund the Somos deal, and said the company’s net debt may reach two times its earnings before interest, taxes depreciation and amortization (EBITDA).

Kroton’s common shares were trading 5.2 percent higher by early afternoon while Tarpon shares surged 25.4 percent.

“Somos Educacao is a gem and we are confident we’ve taken the right step,” Galindo said. The company will not seek further acquisitions in primary education in the short term, he said.

In December, Galindo laid out an aggressive expansion plan including opening 180 undergraduate programs in 2018 as well as acquisitions in Brazil and abroad.

Brazilian antitrust regulator Cade, however, dealt a major blow to Kroton’s growth strategy last June by rejecting its planned 5.5-billion real purchase of Estacio Participacoes SA (ESTC3.SA), a tie-up that would have created the world’s largest for-profit education company.

Cade declined to comment on the Somos deal.

Although Galindo said there was little overlap on schools, he noted that Kroton will have a roughly 20 percent share of the market for learning systems, something that antitrust authorities will need to evaluate.

For Brazilian buyout firm Tarpon, the sale of its education company is a welcome windfall, as the firm has been facing losses through its stake in poultry exporter BRF SA (BRFS3.SA), which posted its biggest-ever loss for 2017 and is beset by fraud allegations. BRF shares fell 38 percent over the last 12 months.