APOL Apollo Education Grp., Inc.

Capella Education Company (CPLA), the provider of online education, recently announced the buyout of Resource Development International Ltd. (RDI), an autonomous distance learning provider of U. K., for $14.9 million.

The all cash deal will enable Capella to gain foothold in the lucrative international market as RDI has a strong presence in both the international and U. K’s higher education market.

Further, RDI operates with the top 100 universities in the U. K., thus allowing Capella to gain access to a large number of candidates. Further, it will facilitate the company in better serving the learner’s community through its educational expertise and web-based learning platform.

Moreover, the conformity also underlines that Capella will make a supplementary payment of approximately $6.4 million to RDI if it gains the right to autonomously certify its degrees. RDI has applied to the British Government (Privy Council) for the approval of the Taught Degree Awarding Powers (TDAP).

Management stated that the deal will be accretive to the company’s earnings in fiscal 2013, while also moderately affecting the earnings of fiscal 2011 and 2012.

Capella focuses on working adults, and in order to draw students, it is also ramping up its marketing and promotional expenditures. The company also hinted at hiking the tuition fees for 2011-2012 academic year, and proposed to offer scholarships and grants to woo students.  

However, the current potential risk looming over the education sector is the regulation proposed by the Department of Education that is weighing upon students’ enrollments and the company’s profits. The Department of Education has proposed that an educational program could only qualify for Title IV funds, if it helps in achieving profitable employment, including the criteria of loan repayment rate and debt-to-income ratios.

The institutions are under the scanner due to the rise in the default rate of student loans, and are now being asked to submit information relating to recruitment procedures and use of student’s grant.

Capella cautioned that new enrollment in second-quarter 2011 is expected to tumble by approximately 40%. Management hinted that other for-profit education institutes facing tougher norms are chasing Capella's students, who are financially sound and have better loan repayment rates.

Given the pros and cons, we prefer to have a long-term ‘Neutral’ rating on the stock. Moreover, Capella, which competes with Apollo Group Inc. (APOL) and Strayer Education Inc. (STRA), holds a Zacks #3 Rank, which translates into a short-term Hold recommendation.

 
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