Education Management Buys 18-College Group for $112.5-Million

By GOLDIE BLUMENSTYK
The Chronicle of Higher Education
Wednesday, June 25, 2003

Education Management Corporation announced on Tuesday that it will pay $112.5-million in cash to buy 18 junior colleges with locations in eight states and a total enrollment of 5,800 students.

The colleges, all part of American Education Centers Inc. and its affiliated companies, offer programs at the associate-degree level and below in a variety of health-care fields, as well as programs in business, computing, and criminal justice.

This is the third purchase announced by Pittsburgh-based Education Management in the past two months. In late April, the publicly traded company announced plans to pay $50-million to buy South University, an operator of four medical-oriented colleges with a total enrollment of about 1,500. South now offers master's, bachelor's, and associate degrees. Earlier this month, the company also announced plans to buy a 115-student culinary school in Vancouver. The exact price for that was not announced, but company officials said it was less than $2-million.

American Education Centers is controlled by a private-investment firm, the Palmer Group, headed by a former dean of the Wharton School of the University of Pennsylvania, Russell E. Palmer.

Together, these purchases, which are all expected to become final by early September, would add significantly to Education Management's enrollment and its national presence. The purchases announced on Tuesday would put the company into four additional states: Indiana, Kansas, Kentucky, and Ohio. By fall, overall enrollment at its campuses will exceed 51,000.

The acquisition will also strengthen Education Management's recent push to diversify its offerings and its student body, said John R. McKernan, the company's president. Now, along with additional programs in health care, Education Management can offer associate-degree programs in business and information technology, areas "which we have not had access to in the past."

The company until recently had been known primarily as the operator of Art Institutes and of Argosy University, which offers doctoral programs in education, psychology, and business.

Mr. McKernan, a former governor of Maine, said his company is also quite interested in the approach to online education that American Education Centers uses in its courses. The blended approach allows students to take a single class through a mix of online and classroom-based instruction. It's similar to the approach used by the University of Phoenix.

Mr. McKernan said Education Management is interested in the blended style because it would appeal to the working adults that the company is trying to attract. Right now, about one-third of Education Management's students enroll right out of high school.

The Palmer Group, based in Philadelphia, began acquiring the colleges of American Education Centers in 1993. Several of the colleges held by the Palmer group are regionally accredited; the rest have national accreditation.

The 18 colleges of American Education Centers generate annual revenues of about $54-million, and earnings of about $12-million before taxes and other expenses. The company has its headquarters in a suburb of Cincinnati.

Mr. McKernan said Education Management's purchase price, equivalent to about 10 times those earnings, was "a fair price in today's market," and comparable to what the company paid for South University. The measure is a standard way of comparing sales prices for colleges of varying sizes.

J. William Brooks, chief executive officer of American Education Centers, said that "price was not the only factor in the sale." The deal resulted from a negotiation that took "culture, value, and mission" into account, he said. Mr. Brooks will stay on at American Education Centers as president after the purchase is completed and will also become executive vice president at Education Management.

In addition to the $112.5-million in cash, Education Management will also assume about $3.5-million of debt that American Education Centers still owes its creditors. Education Management will use a combination of its own cash and money from a line of credit to pay for the deal.