Proposed Agreement with the University of Arizona Creates Meaningful Upside but Execution Will Be Key

11 November 2020

Key Points

  • Zovio is attempting to transform itself from a for profit school with significant regulatory burden into an education technology leader.
  • The announced transaction with the University of Arizona has the potential to create a win/win/win situation: a win for students, a win for the University of Arizona, and a win for Zovio.
  • The cloud over the stock is attributable to mixed industry reputation, adverse political interests, and occasional excessive regulatory demands. This has impacted operations and valuation over the last few years, but this cloud could be lifted with the completion of the proposed transaction, which could lead to improved operational results and a more positive investor outlook.
  • While renewed enrollment growth in the spun off non-profit university will be the key source of upside going forward, continued growth in the Fullstack Academy and TutorMe businesses, and potential service contract wins with other universities represent additional potential sources of upside.

Our Insight

The Opportunities

  • Zovio has an agreement to sell Ashford to the University of Arizona in exchange of a long-term contract to provide services to the newly owned entity combined with a revenue share agreement. We believe the announced transaction can create a win/win/win situation: a win for students who will have continued access to high quality and possibly expanded educational choices; a win for the University of Arizona who is receiving very favorable financial terms and will also gain a new vehicle to offer education opportunities to a wide range of new students; and a win for Zovio who can benefit from the potential success of the renamed school through its service and revenue share agreement.
  • A successful transition of Ashford University into the University of Arizona Global Campus, as well as the secular increase in online learning, which has been further accelerated by the Covid-19 crisis, should boost Zovio’s ability to offer a range of services to other universities trying to build up online offerings.
  • Zovio also owns Fullstack Academy, which provides coding and cybersecurity “bootcamp” programs on two campuses and in partnership with an increasing number of universities, and TutorMe, an online tutoring service that matches high school and university students with qualified tutors (a “Uber” type of model for online tutoring). Both businesses have demonstrated strong momentum.

The Obstacles

The company still needs to complete the sale of Ashford University to the University of Arizona; the sale or spin-off of that business has taken considerably longer than initially expected, although with a potentially much better ending outcome than initially expected; there could well be further delays. The transition to the University of Arizona Global Campus could cause some disruption. The new entity will have to reverse the negative new enrollment trends experienced by Ashford University for Zovio to benefit financially from the transaction; in fact, the transaction guarantees minimum payments to the University of Arizona, and while Zovio has secured an attractive revenue share agreement, this revenue share only kicks in if the new school performs well. Although occasionally counter-cyclical, the business could be affected by the current economic slowdown, as prospective students might become reluctant to invest in their education if economic prospects appear limited