New Structure for EDMC

Education Management Corp. goes private as its enrollment and revenue slump, raising questions about the end of an era for publicly traded chains with disparate holdings.

October 28, 2014

One of the nation’s largest publicly traded for-profits, Education Management Corporation, is about to get less public.

Last week EDMC announced plans to drop its registration with the U.S. Securities and Exchange Commission (SEC) and its listing on the NASDAQ Stock Market. The reason, the Pittsburgh-based company said, is the cost of compliance with public disclosure rules.

“The demands of management's time and the company resources required to continue its SEC reporting obligations and maintain its NASDAQ listing were greater than the benefits received by the company and its stockholders,” EDMC said in a written statement.

This isn’t the first time the company has changed its publicly traded status. EDMC went private in 2006, a decade after its initial public offering. Goldman Sachs and a group of private equity investors paid $3.4 billion for the company in 2006. But it went public again in 2009.

The delisting is part of a broader restructuring of debt and operations. Now major lenders own 96 percent of the company, which has annual revenue of $2.3 billion and $1.5 billion in debt. Fewer than 300 stockholders own shares in EDMC, which are trading for less than $1.

As a largely private company, EDMC can avoid some red tape if it seeks to consolidate, simplify or sell parts of its operations. The Art Institutes, Argosy University, Brown Mackie Colleges and South University chains are spread over 110 campus locations and 18 different accredited entities.

The shift for the company comes in a year when other for-profit chains collapsed or scrambled to deal with federal compliance challenges. The turbulence raises the question of whether the era of huge for-profit conglomerates with a patchwork of holdings might be coming to a close, as the major players retrench and become more focused.

EDMC, like most other for-profits, has been hemorrhaging students. Its enrollment of 118,090 is down from 143,620 two years ago and a previous peak of 160,000. The company has lost $2 billion during the last few years, reporting a loss for the most recent fiscal year of $664 million, compared to $2.3 billion in revenue.

The company has also laid off hundreds of employees and sold facilities. Its 20,800 employees include 2,500 full-time faculty members.

New Normal

The sector’s tight times are due to increasing reluctance among potential students to take on debt, more competition from nonprofits, stricter state and federal policies, waves of lawsuits and investigations, and critical media coverage. EDMC also cited changes in the availability of federal PLUS Loans and cuts to state-based student financial aid programs.

In a recent corporate filing, EDMC said its focus is on improving student success and making sure academic offerings line up with labor-market demands. The company has also tried to be more affordable.

For example, EDMC has frozen tuition prices at its Art Institutes, which account for more than half the company’s total enrollment. It is also spending more on scholarships at the Art Institutes, including a 20 percent tuition discount for students in bachelor's-degree programs, and reducing the number of credits required for a credential in some cases. As a result, the company said, the average debt load for graduates of the Art Institutes is down by 15 percent over four years.

EDMC continues to face many challenges, including a False Claims Act lawsuit from the U.S. Department of Justice. The feds have accused the company of illegally paying student recruiters. Attorneys general in several states have also sued EDMC. And the U.S. Department of Education has placed it under “heightened cash monitoring,” which means more scrutiny of federal aid payments, because of concerns about the company’s financial responsibility.

While those issues won’t go away during the transition to a largely private entity, EDMC will no longer need to issue quarterly statements to investors about legal liabilities, which in turn generate negative headlines and drive down stock value.

As a result, consumer advocates have criticized the move.

“The whole point of being publicly listed is accountability and investor confidence,” said Barmak Nassirian, director of federal relations and policy analysis for the American Association of State Colleges and Universities.

Yet Nassirian, a frequent critic of for-profits, said EDMC doesn’t stand to lose much by going private, now that its shares are penny stocks. He also said unsophisticated investors are better off not being able to buy into for-profit chains, given that the companies are typically dependent on federal financial aid and lack the more diversified revenue bases of similarly large companies in other industries. About 76 percent of EDMC’s revenue comes from federal sources.


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