Education Getting Lesson in Competition

By newsdoug on November 22, 2011

Competition heatinig up on China school bus The latest signals from the education sector, including a mid-sized acquisition by a major foreign player, indicate competition is heating up in the space, posing future challenges for everyone. The latest deal is seeing British publishing giant Pearson (London: PSON) offering to buy a relatively small Chinese firm, Global Education and Technology Group (Nasdaq: GEDU) for just over $11 per share, or $155 million. (English article) That represented a 100 percent premium to Global Education’s last close before the deal was announced, and is nearly 4 times where it was trading in the days before that. The news didn’t help homegrown education leaders New Oriental Education (NYSE: EDU), TAL Education (NYSE: XRS) and Xueda (NYSE: XUE), whose shares all fell amid a broader Wall Street sell-off. Pearson’s latest China education buy follows its earlier purchase of Wall Street English, another major provider of English-language teaching in China, and also follows a move into the market earlier this year by US education giant DeVry (NYSE: DV) (previous post), showing foreign giants, whose ranks also include Disney (NYSE: DIS), realize the big potential in the market and are looking to capitalize on it. Of course all this could mean bad news for homegrown players like New Oriental and Xueda, the former of which reported slowing growth last week while the later posted a widening quarter loss. (previous post) Perhaps sensing vulnerability among the homegrown players, a small investment house, OLP Global, launched a short-selling attack on New Oriental late last week, drawing on recent concerns about the quality of accounting at many US-listed Chinese firms to imply New Oriental may have been playing tricks with its own accounting. The attack prompted New Oriental to issue a statement denying the allegations (company announcement) The statement may have stopped a broad slide for New Oriental shares, but its stock is still down 24 percent since the beginning of November, including a 10 percent drop after it announced its third quarter results. The way things are going, don’t look for the situation to improve for domestic education firms anytime soon.

Bottom line: The latest M&A by a foreign company in China’s education market show competition is growing intense, leaving domestic players vulnerable.

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