The History The Education Group (TEG) was set up by 3 university professors in 2009 in Tunisia. Originally working as lecturers at state universities, the three of them shared the dream of introducing high quality private education to Tunisia and successfully applied to the Ministry of Education to open the first ever private university in Tunisia. After a tough start, parents and students alike started to like the concept of a private university and word of mouth on the TEG started to be very positive. TEG turned a corner and started to grow fast. The demand became overwhelming which prompted the founders to replicate the same concept in several cities across Tunisia. They were helped by the growing number of school graduates who couldn't find places at their university of choice due to overcrowding and under spending at state universities. In a matter of a few years, TEG grew rapidly and the founders were able to attract a professional management team comprised of a deputy CEO (ex Harvard Business School), CFO (ex Laureate), and a COO (ex INSEAD Business School). Today TEG operates 5 sites across several cities in Tunisia, with a plan to triple in size over the next 5 years by branching out elsewhere in francophone Africa. The private education sector has enjoyed tremendous growth in Tunisia and francophone Africa over the past 5 years and TEG has benefited greatly from that growth trend. Below is TEG's latest Income Statement & Financial Metrics: Unit 31 Dec 19 CAGR 14-19 Unit 31 Dec 19 Financial Statements Income Statement Financial Data Revenues Number of Sites Revenue Per Site Total Store Revenues # Sm Sm 5 19 95 20% 15% Financial indebtness Cash Long-term Debt Sm Sm 23 62 Total SG&A Costs % of Revenue Sm % (38) 40% Free Cash Flow Calculation EBITDA $m Less: Capex Sm Less: Change in WC $m Free Cash Flow $m FCF Conversion % 57 (6) (2 new sites) (2) (2% of Revenue) 49 86% EBITDA EBITDA Margin Sm % 57 60% Depreciation % of Revenue Sm % (5) 5% Cost of Equity Cost of Debt 25% 17% Sm % 52 55% Weight of Equity Long-term growth rate 80% 2% EBIT EBIT Margin Interest Expense Net Income (PAT) ) PAT Margin Sm (5) Sm 47 50% The Business Plan Over the next 5 year years, management plans to open 2 new sites every year and to grow the revenue per site at a rate of 15% per annum. This is against the backdrop of an expected revenue growth rate of 10% in the private universities sector in francophone Africa. They also expect the EBITDA margin and depreciation rate to be maintained at their historic levels of 60% and 5% of revenues respectively. The Company enjoys a zero tax rate due to Tunisian Government providing tax incentives for investing in the education sector, and this benefit is expected to continue going forward. Management expects to spend a fixed amount of US$3m of Capex for every new site they will open and expect that Working Capital changes can be maintained at 2% of annual revenues. Management views that 40% of their cash balance is cash needed for operations while the remaining 60% are in excess of the Company's needs. The Proposition You are an investment professional in Platinum Capital Partners PE and your fund is interested in acquiring 40% of TEG's shares from its founders. Conversations with the founders have revealed that their asking valuation for 100% of the shares is US$ 840m cash payment to them. You are required to do the following (total of 100 points): 1. Identify the type of Pe deal that is being contemplated here (5 points) 2. Build a 5 year projections table (2020-2024) based on management's business plan showing the following 6 items: (12 points) Revenues b. EBITDA EBIT d. Capex e. Change in Working Capital f. FCF a. C. 3. Prepare a table based on the founders asking price showing the following based on 2019 results: (15 points) a. Enterprise Value (EV) b. EV/Sales multiple C. EV/EBITDA multiple d. EV/EBIT multiple e. P/E multiple 4. Outline the main drivers of the investment thesis you have in mind for this deal (23 points) 5. Using your projections and the assumptions provided, calculate the WACC and prepare a DCF valuation model for the business. (25 points) 6. In light of the results of your DCF, as well as taking the comps table below into consideration, write a one paragraph investment recommendation that summarizes whether Platinum Capital Partners should acquire the business at the founders asking price or not and why (20 points) Comparable Set for The Education Group Company Name EV/EBITDA P/E Net Income Margin 26.4x 15.6x 14.5x 25% EBITDA Margin 40% 37% 50% Pearsons Group Laureate Group EMK Group UPM Group Middle East Education Group 16.1x 23.2x 16.3x 15.9x 9.5x 19% 28% 17% 13% 19.3x 15.2x 30% 22% The History The Education Group (TEG) was set up by 3 university professors in 2009 in Tunisia. Originally working as lecturers at state universities, the three of them shared the dream of introducing high quality private education to Tunisia and successfully applied to the Ministry of Education to open the first ever private university in Tunisia. After a tough start, parents and students alike started to like the concept of a private university and word of mouth on the TEG started to be very positive. TEG turned a corner and started to grow fast. The demand became overwhelming which prompted the founders to replicate the same concept in several cities across Tunisia. They were helped by the growing number of school graduates who couldn't find places at their university of choice due to overcrowding and under spending at state universities. In a matter of a few years, TEG grew rapidly and the founders were able to attract a professional management team comprised of a deputy CEO (ex Harvard Business School), CFO (ex Laureate), and a COO (ex INSEAD Business School). Today TEG operates 5 sites across several cities in Tunisia, with a plan to triple in size over the next 5 years by branching out elsewhere in francophone Africa. The private education sector has enjoyed tremendous growth in Tunisia and francophone Africa over the past 5 years and TEG has benefited greatly from that growth trend. Below is TEG's latest Income Statement & Financial Metrics: Unit 31 Dec 19 CAGR 14-19 Unit 31 Dec 19 Financial Statements Income Statement Financial Data Revenues Number of Sites Revenue Per Site Total Store Revenues # Sm Sm 5 19 95 20% 15% Financial indebtness Cash Long-term Debt Sm Sm 23 62 Total SG&A Costs % of Revenue Sm % (38) 40% Free Cash Flow Calculation EBITDA $m Less: Capex Sm Less: Change in WC $m Free Cash Flow $m FCF Conversion % 57 (6) (2 new sites) (2) (2% of Revenue) 49 86% EBITDA EBITDA Margin Sm % 57 60% Depreciation % of Revenue Sm % (5) 5% Cost of Equity Cost of Debt 25% 17% Sm % 52 55% Weight of Equity Long-term growth rate 80% 2% EBIT EBIT Margin Interest Expense Net Income (PAT) ) PAT Margin Sm (5) Sm 47 50% The Business Plan Over the next 5 year years, management plans to open 2 new sites every year and to grow the revenue per site at a rate of 15% per annum. This is against the backdrop of an expected revenue growth rate of 10% in the private universities sector in francophone Africa. They also expect the EBITDA margin and depreciation rate to be maintained at their historic levels of 60% and 5% of revenues respectively. The Company enjoys a zero tax rate due to Tunisian Government providing tax incentives for investing in the education sector, and this benefit is expected to continue going forward. Management expects to spend a fixed amount of US$3m of Capex for every new site they will open and expect that Working Capital changes can be maintained at 2% of annual revenues. Management views that 40% of their cash balance is cash needed for operations while the remaining 60% are in excess of the Company's needs. The Proposition You are an investment professional in Platinum Capital Partners PE and your fund is interested in acquiring 40% of TEG's shares from its founders. Conversations with the founders have revealed that their asking valuation for 100% of the shares is US$ 840m cash payment to them. You are required to do the following (total of 100 points): 1. Identify the type of Pe deal that is being contemplated here (5 points) 2. Build a 5 year projections table (2020-2024) based on management's business plan showing the following 6 items: (12 points) Revenues b. EBITDA EBIT d. Capex e. Change in Working Capital f. FCF a. C. 3. Prepare a table based on the founders asking price showing the following based on 2019 results: (15 points) a. Enterprise Value (EV) b. EV/Sales multiple C. EV/EBITDA multiple d. EV/EBIT multiple e. P/E multiple 4. Outline the main drivers of the investment thesis you have in mind for this deal (23 points) 5. Using your projections and the assumptions provided, calculate the WACC and prepare a DCF valuation model for the business. (25 points) 6. In light of the results of your DCF, as well as taking the comps table below into consideration, write a one paragraph investment recommendation that summarizes whether Platinum Capital Partners should acquire the business at the founders asking price or not and why (20 points) Comparable Set for The Education Group Company Name EV/EBITDA P/E Net Income Margin 26.4x 15.6x 14.5x 25% EBITDA Margin 40% 37% 50% Pearsons Group Laureate Group EMK Group UPM Group Middle East Education Group 16.1x 23.2x 16.3x 15.9x 9.5x 19% 28% 17% 13% 19.3x 15.2x 30% 22%