Receives Key Approval for Transformational Sale of Ashford University to the University of Arizona

18 November 2020

Key Points

  • Zovio announced yesterday that its sale of Ashford University to the University of Arizona received approval from its key accreditor (WASC) This is expected to clear the path for an early December closing of the transaction.
  • This transaction should be a win for students, a win for the University of Arizona, and a win for Zovio.
  • This transaction ushers in a new era for Zovio as a leading education technology service company. While Ashford University has been offering a high quality and much needed service to so called non-traditional students (mostly working adults), adverse regulations and hostile political interests had hampered its operations and affected Zovio’s image as a public company. We anticipate a more favorable operating environment for the new entity and a substantial reset for Zovio as a public company.
  • The school should also benefit in other ways from its association with the University of Arizona – a strong brand name and new program development opportunities being amongst the main new advantages.
  • Zovio’s other businesses have performed well this year and we believe the markets will give them increased recognition as investors’ attention can move from primary focus on the proposed transaction to a more holistic assessment of the company.

What Happened?

On Monday, 11/16/20, Zovio announced it had received approval from WASC, Ashford University’s accrediting entity, for the proposed sale of Ashford University to the University of Arizona. The transaction is now expected to close in early December. Subsequent to the sale, Zovio will provide services to the new entity (to be named University of Arizona Global Campus or “UAGC”) and will be reimbursed for these services and will also receive a share of the school’s revenue. This step will complete the transformation of Zovio from a for-profit school to an education technology services company with a portfolio of businesses, including university management services (to UAGC and potentially other schools), Fullstack Academy (information technology courses offered on two company-owned campuses and also in partnership with about a dozen universities and colleges), TutorMe (an Uber-type of online tutoring service that matches students with tutors), and Learn@Forbes, a suite of online business courses offered on a subscription basis.

Our Insight On What Happened

The Opportunities

Despite increasingly difficult regulatory requirements, Zovio has created a major online school with 35,000 students; that school has now been sold to the University of Arizona and will change its status from “for-profit” to “not-forprofit”. The move will ease the regulatory environment under which the school operates; it also represents a significant branding upgrade and opens strategic opportunities for the University of Arizona to utilize UAGC to reach a broad range of new students in the US and possibly abroad.

Zovio will continue to provide UAGC with key services under a long-term strategic agreement with the University of Arizona. Amongst other elements, the agreement specifies the following sequential allocation of annual revenues generated by UAGC:

1. Reimbursement of operating costs incurred by UACG
2. Guaranteed payments to the University of Arizona
3. Reimbursement of services provided by Zovio to UAGC at cost
4. Revenue-share allocation to Zovio equivalent to 19.5% of UAGC revenues
5. Remainder will be at the discretion of the University of Arizona, either to be reinvested in UAGC or retained by the University of Arizona

The guaranteed payments to the University of Arizona amount to zero in 2021, $12.5 million in 2022, $25 million per annum for the years 2023-2025, and $10 million per annum for the years 2026-2035. In addition, there is a 2% cap on annual expense increases to be incurred by UAGC.

We believe these financial arrangements are fair to all parties and, most importantly, align all parties’ interests, namely successful and profitable growth at UAGC.

In anticipation of the transaction being approved, Zovio gave 2021 guidance of $290 million to $310 million in revenue and high single-digit EBITDA margin, which, at the mid-point, could approximate EBITDA of about $22.5 million. We also note that post-closing, Zovio could have approximately $50 million in cash. Finally, we also note that while for-profit schools tend to trade in the 6x to 10x EBITDA range, education tech service companies are typically awarded higher multiples.

The Obstacles

Execution and the economy remain important variables. Schools rely on online marketing to recruit new students and the change of name could cause some short-term disruption (consider the importance of Google search engine optimization on any online marketing activities and the impact of a name change in this context). We believe Zovio’s management is very much aware of this short-term challenge and that it is reflected in the company’s 2021 guidance (although not specified in the guidance, a softer first half and stronger second half of 2021 can probably be expected). The guaranteed minimum payments from UAGC will be increasing from zero in 2021 to $12.5 million in 2022 and to $25 million in 2023-2025. These minimum contributions could affect Zovio’s ability to be fully reimbursed for its services to UAGC and they could also impact Zovio’s revenue-share. On the other hand, the progression of the minimum guaranteed payments to the University of Arizona might indicate the general expectations of the parties involved as to the new school’s progression, although we note that formal expectations have not yet been communicated. Note also that starting in 2026, the minimum payments will decrease to $10 million per annum.

Company Overview

Zovio currently owns and manages Ashford University, a for-profit university with about 35,000 registered students, mostly working adults. Zovio also operates a web development school (the Fullstack Academy) as well as an online tutoring service (TutorMe) matching tutors with students.

Zovio has announced the sale of Ashford University to the University of Arizona who will rename the school the University of Arizona Global Campus. The new entity will receive meaningful services from Zovio and will pay Zovio for these services as well provide Zovio with a revenue-share opportunity.