Edison Schools Inc. received just barely passing grades from Wall Street last week.
The school management company’s initial public offering of stock met with a ho- hum reception from investors Nov. 11. It opened and closed that day at $18.06 per share, just barely above its offering price of $18.
By contrast, many successful IPOs, especially for Internet companies, have doubled in share price or done better in the current hot market for new stocks.
“It wasn’t well received by the market,” Peter P. Appert, an analyst who follows the education industry for the investment firm Deutsche Banc Alex. Brown, said of the Edison offering. “There are a lot of questions about whether K-12 education can be a profitable business.”
| What Is an IPO? |
An initial public offering marks the first time a company sells stock to the public. The main reason is to raise capital for growth or acquisitions. But a stock offering also raises a company’s profile and provides those who own the company’s stock before it becomes public, such as its founders and early investors, a market for selling their shares. The IPO process includes a careful review of a company’s offering by the federal Securities and Exchange Commission and a whirlwind round of presentations by company executives to institutional investors, such as managers of retirement funds and mutual funds. Those big investors get to place orders for the stock at the offering price, which is set by the lead investment bank underwriting the IPO. The rest of the public generally must wait to buy shares once the stock starts trading on the stock market. |
Edison, which was founded in 1991 by Christopher Whittle, manages 79 schools serving some 38,000 students. It is perhaps the most closely watched entrant in the nascent business of for-profit management of public schools and charter schools. The company’s IPO was viewed by some observers as a milestone for the for-profit education industry.
“This is a momentous event,” said John M. McLaughlin, the editor of The Education Industry Report, a newsletter that focuses on for-profit education companies.
Despite the stock’s modest performance, he said, the budding K-12 management industry now has a prominent company that is publicly traded. The closest venture to it among publicly traded companies is Tesseract Group Inc., which operates charter schools and preschools. That company’s stock has performed poorly since its troubled relationships with the Baltimore and Hartford, Conn., school systems under its old name, Education Alternatives Inc.
Edison executives declined to comment on the company’s stock, citing federal securities regulations requiring a “quiet period” surrounding an initial public offering.
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The company issued a statement noting that it had completed the offering of 6.8 million shares at the $18 price, which raised $122.4 million. Based on the Nov. 11 closing price, the company has a market valuation of $762.9 million.
Edison said in its stock prospectus that it planned to use the proceeds of the stock offering “to fund future operating losses and capital expenditures related to our growth.” Its stock is trading on the NASDAQ stock exchange under the symbol EDSN.
‘No Going Back’
Merrill Lynch Inc. was the lead underwriter of the stock offering, which had an initial target range of $23 to $25 per share for 6 million shares. Last month, the IPO was revised to 6.8 million shares, but with a target range of $21 to $23 per share.
The offering came during one of the biggest weeks ever for initial public offerings, including the record offering of United Parcel Service Inc. But analysts said investors were picking and choosing between Internet-related companies, which have done well with IPOs even if they are not yet profitable, and other sectors.
“Edison Schools is a good concept in the making, but it is not garnering the attention in the market,” said David Menlow, the president of IPO Financial Network, a Millburn, N.J., firm that tracks new stock issues.
“To price the stock three points below the low end of its range means the market was just not enamored with this issue,” he said.
Mr. Appert said investors may have been concerned about Edison’s lack of profits so far. The company had revenues of $133 million in its 1999 fiscal year, with a loss of $50 million. It has incurred total losses since its inception of some $140 million, but it does have the backing of some prominent investors, such as J.P. Morgan Investment Corp. and Vulcan Ventures Inc., an investment company controlled by Microsoft Corp. co-founder Paul G. Allen.
“Operating schools is proving to be a challenging market,” Mr. Appert said.
J. Michael Locke, a vice president and an education industry analyst with Banc of America Securities in San Francisco, was more upbeat.
“Clearly, it’s the first mover in a market, and you have to do a lot of educating of the investment community about the [education services] market,” said Mr. Locke, whose firm was an underwriter of the IPO. “The big picture is that this is a positive thing for the education industry. There’s no going back now.”
