Lincoln Educational Services would entertain large deal, CEO says

Lincoln Educational Services, [Nasdaq:LINC], a West Orange, New Jersey-based operator of career colleges, would consider a transformational acquisition and could partner with private equity on such a deal, said Scott Shaw, CEO.

The company was ready to embark on a campaign to make acquisitions or build more schools organically in November of 2019, when it increased its liquidity and announced new credit facilities totaling about USD 60m with Sterling National Bank. Lincoln’s employer partners have been asking the company to expand beyond its predominantly Northeast base to faster-growing markets in the South and West. It has campuses in 14 states.

When the company was out looking for acquisitions last year, multiples ranged from 4 to 10 times EBITDA, with nursing schools at the high end of the range.

“We looked at a number of acquisitions but weren’t able to close any. That’s okay. We’re patient investors. Multiples were higher than they should [have been],” Shaw said.

The coronavirus pandemic could result in future opportunities for acquisitions at more reasonable multiples, he said. Small mom and pop school operators might need help transitioning online and there could be other opportunities to expand its footprint, Shaw said.

Universal Technical Institute [NYSE:UTI] was talked about as a target for the company in 2017 when UTI’s activist investor, TALANTA, urged it to explore an all-stock business combination with Lincoln.

When asked about UTI, Shaw said “there definitely could be a lot of synergies,” He noted that “they are in the West and the South.” For example, UTI has three schools in California, and in Florida, North Carolina and Arizona, where Lincoln does not have any presence, Shaw said.

UTI, with a market cap of USD 200m, is much larger than Lincoln partly because of its big presence in the automotive mechanic training space, Shaw said. Though Lincoln only has a USD 63m market cap, that wouldn’t prevent a deal from happening, he added.

Asked whether Lincoln has considered a take-private, Shaw said: “Yeah. We give thought to everything.” He said he thinks the company's stock is cheap. “We’re kind of trapped in the microcap world.” Lincoln recently traded at USD 2.39 a share against a 52-week range between USD 3.25 and 1.51.

“An acquisition would potentially push us out of the microcap zone. Private equity could help. Or we could help a private equity-owned group go public by merging with us,” he said.

Competitors in the skilled trades training space include Summer Street Capital-backed Tulsa Welding, which he said would be “an interesting opportunity.” He also mentioned Ohio Technical College, a Cleveland family-owned diesel technology school, and New England Tractor Trailer Training School. The only publicly traded competitor is UTI, he said.

Right now, Lincoln is focused on adjusting to the coronavirus pandemic. It had to make rapid changes from a mainly campus-based model to distance learning in a week’s time, Shaw said. The company already had some blended programs in place “but we had to ramp that up from a handful to 100% of instructors.”

The company is using a learning management system called Canvas, he said. Canvas’s parent company, Instructure, agreed to be taken private in February by Thoma Bravo for USD 49 a share or about USD 2bn.

Lincoln has supported its faculty and has given teachers the flexibility to do what they think is best. For example, teachers of auto mechanic training courses are live streaming video instructions from their garages, he said.

“The creativity has been great. We can’t operate this way forever but for a couple of months we have enough material to keep students engaged.” Shaw said he hopes to get students back to campuses by June because much of its courses require hands-on learning.

Total revenue increased 3.6% to USD 72.6m in Q4 2019 from Q3 2018; same school revenue up 4.8%. About one-third is from healthcare-related fields such as licensed practical nurses and medical assistants; one third is from automotive/transport fields and the remaining third is skilled trades including electricians, welders and HVAC. It recently added robotics and CNC machining training.

Through the crisis, Lincoln said attendance is up and enrollment remains strong. The company was coming off eight consecutive quarters of growth despite the fact that unemployment had been extremely low. He said in recent years people have been questioning the high cost of a traditional college education relative to the job outcomes.

At Lincoln, “they can acquire a skill that makes them employable for a lifetime. What we offer won’t be replaced by a machine. It will require a human,” he said.

Traditionally, trade schools tend to fare well when the economy struggles, Shaw said. “As unemployment rates shoot up, people look for more stable, longer-lasting careers” outside of restaurants and retail, he said.

“We always see an enrollment spike during periods of unemployment.”

Several of Lincoln’s employer partners are still hiring Lincoln graduates but delaying the start dates until the economy reopens, he said.

The last acquisition the company made was five or six years ago. Since then, the industry has been contracting and enrollments have been shrinking for profit postsecondary education, he said.

Deloitte is the company’s accountant. McCarter English is its law firm.