Price expectations for a sale of Capita’s Education Software Solutions (ESS) unit have softened significantly after bidders baulked at bankers’ initial asking price of £500 million-plus, leading one to drop out, EducationInvestor Global can reveal.

This publication has learnt that Capita ESS, originally touted by bankers from Goldman Sachs at £500-£700 million, is likely to change hands for closer to £400 million due to extensive post-purchase costs to be incurred by an acquirer.

Multiple sources confirmed that TPG Capital, the US-based buyout house that had tabled a first-round bid alongside Bain Capital and Montagu Private Equity, has dropped out of the race to acquire Capita ESS.

Sources said that Bain Capital and Montagu Private Equity have both been admitted into the second round of bidding for Capita ESS, whose SIMS platform is used by 80% of UK state schools.

So has Francisco Partners, another American private equity firm, which would look to acquire Capita ESS through its portfolio company Renaissance Learning, a cloud-based assessment, teaching and learning solutions provider to over a third of US schools.

But none of the suitors has so far shown willingness to pay at least £500 million for Capita ESS, two sources said, whose parent’s market capitalisation, at present, is only £497 million. It is “not very normal”, said an experienced deal-maker, for a carved-out company to be valued in excess of its owner.

There is “no way” that Capita will achieve £500 million for its ESS division, said one source close to the auction, pointing to SIMS’ “shrinking” market share and the post-takeover cost of modernising the antiquated platform, which runs on in-school data servers.

Another source suggested that “it will probably take two years” to get SIMS “back on the path to growth” and prevent it from losing further customers to cloud-based competitors such as Arbor and The Key – which are set to merge this month – BromCom and Juniper.

Both the insiders said that Capita ESS will trade at “closer to” £400 million than £500 million, with the former figure representing eight-times its annual earnings before interest, tax, depreciation and amortisation (EBITDA) of £50 million.

The pricing recalibration will deal a blow to vendor Capita, which had been slated to use the proceeds from a sale of its ESS unit to clear some of its debt, which totalled nearly £2 billion last year, during which it lost £64.2 million while revenue dipped 6% to £3.68 billion.

Bain Capital is “especially unlikely to get to that [£500 million] price”, said one source. This is because the $105 billion private equity firm has a history of buying companies at cut rates and leveraging its in-house management consultancy, Bain & Company, to drive value growth throughout the holding period, the person added.

Nevertheless, Bain Capital is “in a good position”, the source said, after it “hung around the hoop” in the face of punchy price expectations.

“There was a bit of concern [within Bain Capital] when the £500 million-plus numbers were being touted,” said the source. “Bain wouldn’t get to that price. If pricing stayed that high, they wouldn’t prevail. But they have stuck it out as others [TPG Capital] have fallen away. The type of investment this is involves rolling up the sleeves and getting hands dirty – something at which Bain is experienced.”

Another insider said that Bain Capital is “gung-ho”, and has hired a number of advisors – including EY-Parthenon to conduct financial due diligence – to help it formulate a second-round bid, due at the month’s end. It is understood that Bain & Company has also been mandated in an advisory capacity.

Francisco Partners, which manages $12 billion of assets, is also in with a chance of acquiring Capita ESS for below the initial asking price – but could be willing to pay more than Bain Capital.

Renaissance Learning, which Francisco Partners took over in 2018, is described by the source as “a bit of a beast with a huge presence in the US” that sells products and services to schools similar to those offered by Capita’s SIMS. The company’s annual EBITDA exceeds $100 million, it is understood.

Under the ownership of Francisco Partners, Renaissance Learning has been “eyeing the UK market for several years” as an avenue to further growth after the pace at which it had been amassing scale in the US slowed.

“It has gotten so big in the US that it has struggled to continue growing,” the source said. “It has been looking at the UK to find a good-value platform that it can invest in and grow, leveraging the technology and experience it has built in the US.”

Because of the “strategic fit”, Francisco Partners “might be able to stretch a bit further on price” than Bain Capital, the source said, adding: “If I were a gambler, I’d put my money on Francisco Partners.”

Bain Capital declined to comment. Spokespeople for Goldman Sachs and Francisco Partners had not responded to requests for comment at the time of publication.

Plans to sell Capita ESS were revealed exclusively by this publication in June, when the outsourcing giant had set its stall targeting a price-to-earnings multiple of 10-14 – suggesting the business would fetch £500-£700 million at auction.

Widely regarded as the crown-jewel asset of Capita ESS, SIMS, the UK’s largest and oldest school management information system (MIS) provider, enables schools to collect and monitor data on student attainment, parental engagement and financial management. More than 50 products are listed on its website, which are used by more than 21,000 schools in 49 countries.

The auction of Capita ESS – and with it SIMS – triggered a wave of activity in the UK MIS market.

In July, EducationInvestor Global revealed that three private equity firms had been competing to acquire a minority stake in a new entity that will be formed by a merger of Arbor Education and The Key. Earlier this month, we reported that CBPE Capital had entered exclusive talks to acquire a slice of the joined-up firm.

Meanwhile, the shareholders of iSAMS, the UK private school sector’s favoured MIS provider, earlier this month instructed corporate financiers from Grant Thornton to explore options around a sale.

Private equity-backed Juniper Education, a competitor to SIMS, has since January made three bolt-on acquisitions, bolstering its suite of school MIS products.

Date published: 30 September 2020

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