Grand Canyon Rethinks For-Profit Status

One of the nation's largest for-profit colleges is thinking about becoming a nonprofit. 

October 30, 2014
 

Executives at for-profit Grand Canyon University want to turn the company into a nonprofit, they said Wednesday, because of the "stigma" of being a for-profit.

The move, if it happens, would be the first of its kind involving a publicly traded college company. While several for-profit colleges have become nonprofits, none of them were publicly traded like Phoenix-based Grand Canyon Education Inc.

Grand Canyon is one of the largest colleges in the country and one of the few successful for-profits left on the market. The company is valued at about $2 billion, has 68,000 students, and earned $500 million in the last nine months.

The Christian university cited its stagnant stock price, the advantage of reducing its tax burden, and the ability to give tax write-offs to donors as reasons the move might make financial sense.

Grand Canyon’s C.E.O., Brian Mueller, also said the university was a victim of the stigma surrounding for-profits. Most of its students are online, but it is planning to expand its traditional campus to accommodate 25,000 students.

The move to make Grand Canyon look less like a for-profit and more like a nonprofit, Mueller said, has created consternation and discomfort among the traditional nonprofit colleges with which it competes. In conference calls with the press and financial analysts, he repeatedly cited the criticism of Grand Canyon by Arizona State University President Michael Crow.

Going nonprofit could change that.

“It just allows us to join the traditional academic community with a financial model that they are comfortable with,” Mueller said.

Trace Urdan, who analyzes for-profit higher education companies for Wells Fargo, said it seems clear Mueller thinks that his institution's for-profit status runs counter to its students’ interest.

“But who cares, right?” Urdan said. “I think Brian cares. I think he wants to be the president of a university without an asterisk next to the title.”

In the call for investors, Mueller talked about how Grand Canyon’s swim team couldn’t compare its scores to Arizona State’s because of efforts led by Crow.

“From the perspective of public equity investors that’s not the kind of thing you want your C.E.O. to be obsessing about,” Urdan said.

To become a nonprofit, Grand Canyon will have to get shareholders to back the deal – and find some way to buy back all the shares.

That is likely to cost at least as much as the $2 billion value of the company, if not more.

It’s unclear where that money would come from. Grand Canyon could take on debt. That could be a burden in the long run and risk running afoul of ratios established by the U.S. Education Department to ensure colleges are financially stable and responsible.

A nonprofit entity could also buy Grand Canyon. That nonprofit could be one that exists – though it’s not clear who has $2 billion sitting around and the desire to buy a university right now. Or some interested parties could put together a nonprofit and put up their own money.

Grand Canyon was founded in Arizona in 1949 as a traditional private nonprofit Christian college, but the company turned for-profit in 2004 and became publicly traded in 2008.

Thanks to an ambitious growth plan that relied heavily on online education, the university that was once $20 million in debt and had fewer than 1,000 students on campus is now a national behemoth. Right now, about 13,000 students – about a fifth of its overall enrollment – attend class in person. The rest are online.

Grand Canyon's tuition has been frozen for six years and is inexpensive compared to other for-profits. A block of up to 18 credits is $8,250. And the university is drawing in students. About 25 percent of its incoming students this fall came from California.

While some college companies may want to shed their for-profit status to avoid regulation, that doesn’t appear to be the reason Grand Canyon is considering the move.

Earlier this year, the university lobbied for a bill to avoid an estimated $1.5 million in property taxes next year – plus more in years to come. The effort failed. Mueller said the university pays about $85 million a year in property taxes. Those are taxes it would not have to pay if it were a nonprofit.

Though he cited the stigma of the for-profit status as a reason to make the switch, he said the company had not studied the effect of a change in tax status on enrollment and did not believe it was a major problem.

“It rarely comes up, unless the Arizona State president brings it up,” Mueller said.

Mueller’s comments about stigma introduce a possible paradox into the for-profit sector: Grand Canyon says it operates just like a nonprofit and is stigmatized merely because of its for-profit tax status. It doesn’t, for instance, pay dividends, so it isn't turning its earnings over to investors, though shareholders are buying the stocks in hopes of selling them at a higher price.

If one accepts that view, Grand Canyon’s behavior should assuage some critics of the for-profit sector who argue for-profits inherently behave poorly. Yet, in Mueller’s view, Grand Canyon has alienated nonprofits because it looks and operates like them rather than a traditional for-profit. There is, in this formulation, little room to win for for-profits.

Crow accused Grand Canyon of trying to play sports only to drive up its profits. “They’re trying to game college athletics to drive up their stock price,” Crow said in an interview earlier this year. “It’s just too much.” The university company has likewise been criticized for advertising its Christian missionfor marketing purposes more than anything else.

Grand Canyon has been working on the deal for about six months. So far, it has talked with the Arizona governor; its United State senators; its accreditor, the Higher Learning Commission; and the U.S. Education Department. The Obama administration has stepped up its regulation of for-profits. Mueller said Grand Canyon had received “huge support” from the department for its plans to become a nonprofit.

The move, if it can be worked out, is expected to take about six months to a year, he said.

Urdan, the financial analyst, said there were several obstacles, including shareholders and possibly the Internal Revenue Service, which may pay close attention to the deal to make sure there is not self-dealing involved in who benefits from the deal.

“If it pulls this off and there is a win, win, win -- then that has enormous implications for the sector,” Urdan said.

The company's shares were up nearly 10 percent in after-hours trading.

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