Last week’s news that Oxford International Education Group (OIEG) is in the hunt for buying Cambridge Education Group (CEG) could be the first step in consolidation for the pathway sector. It comes after a few torrid years where aspirations for pathway growth in the US foundered and the pandemic wreaked havoc with global student mobility. Murmurs that QA Higher Education may also be on the block and long-standing speculation that Andrew Colin and/or Leeds Equity might seek options on their investment in INTO make for a potential realignment of interests.
On the face of it a trade sale for CEG has the advantage of reducing recruiter competition in a market where new entrants have been one factor in the growing cost of student acquisition. It would also make for a group that had some genuine clout with fifteen UK pathway partners1 including a Russell Group name in the University of Southampton. Both have minor interests in the US and CEG bring European partners and a burgeoning digital business with ten partners listed.
In the UK2 this would make it larger than Navitas (11), Kaplan (11) and INTO (6) and the same size as Study Group (who lost Coventry London in 2022 and where rumours suggest another possible defection in the north of England). It’s a point where you could see one of those players having a look at QA Higher Education who have seven university partners including four where they offer a pathway but six where they deliver an undergraduate degree programme in partnership with a university. The restructuring could even extend into consolidation of pathway operators with the aggregator and OPM markets.
From Strength or Weakness?
A recent comment on mergers and acquisitions suggested that “you can’t keep a good capitalist down and eventually greed will overcome fear.” Many investors have cash in hand after a year with little action and there are suggestions CEG is available for between £150m and £200m. The financial returns of the various elements of CEG and OIEG are not easy to divine from published information but one can either read or deduce a number of things:
Cambridge Education Group
The financials below come from the accounts of Camelot Topco, ultimate parent company of CEG3, for the year ended 31 August 2021.
ONCAMPUS revenue declined in 2021 to £39.6m due to the pandemic but was £54.4m in 2020. CEG Digital revenue increased to £12.1m in 2021 from £6.2m in 2020 (one would presume partly due to pandemic related online measures). Underlying EBITDA was £7.8m in 2020 but fell back to £3.2m in 2020 due to the pandemic. Across the two business there were around 4,000 students enrolled.
Oxford International Education Group
The financials below come from the accounts of Sparrowhawk 2 Limited, the holding company of OIEG4, for the year ended 31 August 2022. The comparative year on year numbers span the acquisition of the business in early 2021.
Overall turnover increased to £58.8m from £33.4m the previous year. This includes pathways, a separate English language business, operations in north America, IELTS testing and two businesses in India. It is possible to deduce that at least £14.5m of the £58.8m is not pathway related but the accounts state that pathway revenue had increased £11m year on year. The numbers indicate that the business made a small operating loss on the year (£0.9m) but it is stated that this masks an “underlying profit of £2,907k”. The business is forecast to “generate positive EBITDA” during the financial year to August 2023.
Without having CEG’s accounts for 2022 it is not possible to know what a comparative performance to August 2022 was but one would anticipate a rebound in pathway business aided by the addition of new partners. The business is also able to trumpet the addition of Loughborough University, who have been talking with potential pathway operators since at least 2007, as a partner in December 2022. All in all, it looks as if OIEG would be taking on a larger business with some substantial and complementary assets.
Caveat Emptor
CEG is able to tell a strong story on digital developments and a growing portfolio of well ranked partners which might make it a very attractive proposition. OIEG is an aspirational business which can point to partners that have done very well out of the growth in UK student recruitment with the University of Greenwich being one of the most significant beneficiaries of the growth in the Indian market. So, what could possibly go wrong…
Anyone looking at the UK government’s turbulent approach to international student recruitment would point to the continuing possibility of changes to visa policy as a Conservative Government prepares the ground for an election in no more than 24 months. Significant limitations on student family members (other than with PhD students) and constraints on post study work are two of the main ghosts at the feast. More severe limitations on lower-ranked universities and “poor quality courses” would be particularly damaging to both CEG and OIEG portfolios.
Alongside that is the sense that CEG might see a window of opportunity that means a race to the exit is the most sensible option in a market where several factors could compromise future performance. Examples include the evident resurgence of Australia as a competitor after several years of weakness, as well as the reality that Canada remains strong and the US seems to be concentrating on visa turnaround times in major growth markets. All that is before the revitalisation of China as an international student recruiter with eyes on Africa and India, which seems an inevitable consequence of its borders reopening after COVID.
Those who have been involved in mergers and acquisitions will also recognise the substantial risks involved in trying to merge business cultures, operational activities and brands. For pathway operators, even as they become increasingly involved in direct recruitment, there is the added challenge of a sales team trying to cope with a plethora of university brands in their bag and not doing justice to any of them. Smart universities will also have the potential for amendments to contracts if ownership changes and could choose to negotiate hard on revised targets and penalties for failure.
What seems likely is that consolidation will come sooner rather than later as some operators and investors head for the exit doors while the UK environment looks acceptable. The possibility of aggregators, online delivery and post study employment options coming into the mix are likely to make for an interesting year. Interesting times.
NOTES
- This count includes seven OIEG partners and the eight listed in CEG’s ONCAMPUS brand.
- This is likely to be contested territory but I have attempted to review those relationships which are on campus, joint ventures, and have a pathway element. Authoritative corrections are welcome.
- The ultimate controlling partner is Bridgepoint Euro IV Fund managed by Bridgepoint Advisers Ltd. The interest was purchased in April 2013 for a reported £185m. In July 2019 reports indicated that Bridgepoint had sold the CATS Colleges division of CEG to Bright Scholar for a transaction value of £150m.
- The ultimate controlling party is THI Holdings GmbH which acquired a majority stake in March 2021 in a deal which saw OIEG’s schools division sold to Nord Anglia Education.
Image by Pete Linforth from Pixabay