Good morning, welcome to Adtalem's Conference Call. All participants will be in listen only mode until the question and answer portion of the call. This call will be recorded. I would now like to turn the call over to Maureen Rysak, Vice President, Treasury and Investor Relations.
Thank you. Good morning, everyone, and thank you for joining us today to discuss Adtalem's agreement to acquire Walden University, which we announced earlier today. Joining me today are Lisa Wardell, Chairman and Chief Executive Officer Mike Randolphi, Chief Financial Officer and Stephen Beard, Chief Operating Officer. You will find a brief slide presentation in the Investor Relations section of our website, investors.adtalem.com, and we'll walk through that presentation this morning. Before we begin, I'd like to draw your attention to the forward looking statements and additional legal information, which are available at the beginning of the presentation.
As a reminder, today's conference call contains certain projections and other forward looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements as more fully described in Slide two of our presentation. Additionally, Adtalem's Form 10 ks filed with the SEC on 08/18/2020, includes additional information on the risks and uncertainties that may bear directly on our business. Now I'd like to turn the call over to our Chairman and Chief Executive Officer, Lisa Wardell.
Thank you, Maureen. Good morning, and thank you for joining us. Today, we are extremely excited to announce an agreement to acquire Walden University, a leading online health care education provider from Laureate Education. This transaction is the next step in our ongoing transformation to a leading workforce solutions provider and one that provides us increased scale, enhanced capabilities, expansive synergy opportunities and significant long term value creation for shareholders, all while amplifying the social impact we have on our students, employer partners and the communities that we serve. Financially, Walden is expected to be significantly additive to Adtalem's free cash flow, excluding special items in year one and accretive to EPS from continuing operations, excluding special items by year two.
We expect annual cost synergies of approximately $60,000,000 $30,000,000 of which we expect to be realized in the first twelve months, with the potential for incremental upside from revenue synergies. Our projected ROIC is also 25% to 50% above our current weighted average cost of capital of approximately 8%. We will go into more detail on the financial benefits this transaction provides later in the presentation. We are proud that this acquisition will create a national leader in health care education, providing students, especially underserved students, with access to high quality education across modalities and price segments. We are also enthusiastic about the value this transaction provides our shareholders.
It is highly accretive and provides Adtalem with a clear opportunity for long term value creation. This acquisition provides the company with a breadth of online and on campus offerings in an industry with extremely attractive short term and long term tailwinds, including demand for health care professionals well in excess of current supply and a greater understanding and usage of online health care education. I'd like to start on Slide five with a brief overview of the transaction. The total purchase price is $1,480,000,000 and represents a compelling presynergy adjusted EBITDA multiple of 8.4x. The transaction will be financed with committed financing led by Morgan Stanley.
Walden will operate as a distinct independent institution, and the Walden brand will be retained as part of Adtalem. We also plan on retaining key members of Walden's leadership as they and their team bring additional experience in online learning and expertise in the health care sector that will further strengthen our bench of talent at Adtalem. The transaction is expected to close in the 2022, that is mid calendar year twenty twenty one, subject to approvals by the Department of Education, state regulators and relevant accreditation bodies, including the Higher Learning Commission, among other customary regulatory approvals and closing conditions. Moving to Slide six. You can see the transformation of Adtalem into a workforce solution provider with scale in medical and health care through the addition of quality health care institutions and the streamlining of the portfolio away from noncore assets in order to be laser focused on growth assets and growth industries, those industries those health care industries with superior academic outcomes.
Walden is the next logical step in adding quality programs that both provide social impact in the communities we serve and allow us to solve complex problems for hospital systems at scale. On Slide seven, you can see an overview of Walden, their key metrics and their accolades. Walden is a fully online university with strong offerings in the health care vertical and provides bachelor's, master's and doctoral degrees to more than 50,000 students across all 50 states and in 160 countries. We believe Walden is a fantastic fit for Adtalem, not just commercially, but also culturally given our shared values and passion for serving students as evidenced by their achievements in recent years. Walden is the number one conferrer of MSN degrees in The U.
S. And number one among three seventy two U. S. Institutions for awarding doctorates to African Americans. Moreover, Walden was the first fully online university accredited by the Council on Social Work Education as well as six other specialized accreditation.
Turning to Slide eight. As mentioned at the beginning of our call, this acquisition will create a premier national health care educator and address the growing importance of and demand for online learning modalities. Our combined institutions will have over 90,000 enrolled students, will be 82% online and offer approximately 100 degree programs ranging from bachelor's to doctoral degrees, with twothree of those degrees at the graduate level. Together with Walden, Adtalem will be number one in undergraduate and graduate nursing enrollment in The United States and the number one provider of MDs, PhDs and nursing degrees to African Americans. These are numbers we're very proud of, and we are honored to assume the responsibility associated with helping make these impressive numbers possible.
Our market leading position across a spectrum of nursing programs will also be unrivaled. As you can see on Slide nine, based on 2019 data, the combined company will command the number one rank in Bachelor's Degree of Science in Nursing, BSN, Family Nurse Practitioner, Master of Science in Nursing and Doctor of Nursing Practice, DNP, and continue to expand our already significant enrollment advantage over our next closest competitor. I will now turn it over to Mike, who will walk you through the financials in greater detail.
Thank you, Lisa, and good morning, everyone. Our first threshold when evaluating any M and A opportunity is the potential for ROIC to be greater than our cost of capital and the accretive nature of the transaction. As we detailed in the next few slides, the acquisition of Walden provides meaningful incremental free cash flow, is expected to be highly accretive after year one and will generate an ROIC well above our current weighted average cost of capital. Turning to Slide 10, you will see that Walden is expected to add substantial free cash flow from year one and onwards. By year four, the transaction is expected to contribute $140,000,000 to Adtalem's free cash flow.
The free cash flow generated from the acquisition will increase our financial flexibility. Specifically, it will enhance our ability to invest in future growth and contribute to our capacity to delever. Turning to Slide 11. This acquisition is also highly accretive. We expect earnings per share from continuing operations, excluding special items, accretion of $0.75 in year two, increasing to $1 in year three and $2.35 in year four after the effects of purchase price accounting fully subside.
It is important to note that dilution in year one is entirely due to purchase accounting impacts to the income statement, which are noncash in nature. Nevertheless, the transaction provides significant long term value creation for shareholders. Turning to Slide 12. This long term value creation opportunity is expected to generate an ROIC of between 10% to 12% beginning in year one, which is 25% to 50% above our current weighted average cost of capital of approximately 8%. Not only is this transaction extremely compelling with strong commercial logic, but it is a very efficient use of capital that we believe will create significant long term shareholder value.
Turning to the next slide on Slide 13 on financing. This transaction takes our pro form a net leverage ratio to 2.8x as of 06/30/2020. We are confident in our ability to realize the full potential of the transaction while maintaining a strong balance sheet. We expect to have the ability to delever to under 2x within twenty four months of the close, if desired. This is enabled by the financial benefits of the transaction, which are expected to result in margin expansion and robust free cash flow generation.
I will now turn the call over to Steve, who discuss the industry dynamics and the experienced Walden team that we expect will join the Atalem family.
Thank you, Mike, and good morning, everyone. Turning to Slide 14, which we presented during our twenty nineteen Investor Day. We have very clear criteria when evaluating M and A opportunities to ensure that we are creating long term value for our shareholders. As an asset, Walden meets our requirements and expectations in each of these important areas. For example, as Mike mentioned, the acquisition of Walden is expected to generate positive free cash flow, excluding special items, and be accretive to EPS from continuing operations, excluding special items.
Additionally, with Walden, Adtalem becomes an even more strategically focused business with increased scale and enhanced capabilities. Furthermore, Walden's talented leadership team and staff will further solidify Adtalem as the national leader in health care education with an unmatched depth and breadth of online, on campus and hybrid education offerings and clinical partnerships. Turning to Slide 15. We're really excited about this transaction and the opportunities it provides to us to increase scale, enhance our capabilities, amplify our social impact, all while creating significant long term value for shareholders. Specific to our ability to scale, the health care sector and online education areas are growing rapidly.
Based on a report from Burning Glass Technologies, health care practitioners and health care support rank amongst the highest occupations in which demand exceeds supply. In nursing alone, the Bureau of Labor Statistics estimates the health care industry will need more than 200,000 new registered nurses each year through 2029 to fill newly created positions and to replace retiring nurses. The COVID-nineteen pandemic has only strengthened our conviction in our decision to acquire Walden. It highlights the need to bolster the health care sector, its accelerated innovations such as telehealth, and it's further exposed the geographic and demographic disparities in access to quality health care, which we aim to address with quality graduates serving diverse communities. Slide 16 illustrates the nursing education market continues to grow, and we've experienced a growing demand for online learning.
Degrees granted by online providers have outpaced degrees granted from on campus or hybrid models over the last five years. This is especially true for primarily online nursing enrollment, which has grown faster than hybrid and on campus delivery models across the top 25 nursing institutions. Turning to Slide 17. By adding Walden to our existing health care portfolio, Adtalem becomes an even more strategically focused business with significant scale, and we'll be able to increase the talent supply necessary to address the rapidly growing and unmet demand for health care professionals in The U. S.
And abroad. As shown on the slide, the transaction also addresses the growing importance of online learning and will create a pro form a online student cohort of 82%. Walden's depth and breadth of online expertise will enhance our ability to serve students across proven learning modalities and reach more lifelong learners with education options that fit their needs and their lifestyles. We believe that offering this kind of flexibility to our students is a huge value proposition that will aid in recruitment, retention and outcomes. Turning to Slide 18.
A combined Walden and Adtalem will be able to enhance our existing portfolios by transforming how we integrate and deploy capabilities across the enterprise. This acquisition is expected to provide significant potential for growth and margin expansion through new and expanded offerings as well as revenue synergies. Turning to Slide 19. Much of the value in this transaction is in Walden's online capabilities and experienced leadership team and staff. Given this, we're excited to welcome talent with specific experience in online learning and expertise in the medical and health care sector, including Walden executives Paula Singer, Stephen Tom and Jeff Tagnolo.
Turning to Slide 20. With Walden, Adtalem will have an even greater ability to broaden access to high quality education for students through an unmatched depth and breadth of online, on campus and hybrid educational offerings and clinical partnerships. Through the acquisition, Atalem will also gain additional capabilities in multiple learning modalities, which have become increasingly important since the onset of the global pandemic. In addition, Walden will gain access to Atalem's innovative offerings and our track record of delivering outstanding student outcomes. On Slide 21, we see that the acquisition is expected to provide approximately $60,000,000 in annual cost synergies through increased efficiencies in marketing spend and back office operations.
This will allow us to capture cost efficiencies without negatively impacting the student experience, something that is of utmost importance to us. We also expect incremental upside from revenue synergies by providing new and complementary educational offerings, increased student acquisition and retention capabilities as well as enhanced scale and coverage that will allow for new and more robust partnerships with mid- and large sized employer partners in the health care sector. Once again, we are thrilled about the potential unlocked by this acquisition. The increased scale, experience and added modalities will benefit all of our stakeholders. But more importantly, this transaction will further our mission and address the growing need for qualified health care professionals.
And with that, I'll turn the call back to Lisa.
Thank you, Mike and Steve. Since I became Adtalem's CEO, we have worked to focus Adtalem's portfolio and divest those businesses that were not aligned with our long term growth strategy. The acquisition of Walden is a pivotal next step in our ongoing transformation to a leading workforce solutions provider with substantial scale in the rapidly growing health industry, solving increasingly complex talent supply challenges for health care providers. In summary, we are excited about this transaction and the opportunity it offers. Walden is a strong strategic and cultural fit for Adtalem and importantly, builds on our commitment to providing greater access to education, particularly for students of diverse backgrounds and those from underrepresented demographics.
We remain committed to maximizing long term shareholder value and believe this transaction creates a compelling opportunity to do so. With a wide breadth of online, on campus and hybrid health care program offerings, this acquisition will significantly expand our national health care education footprint and will further enable us to reimagine the future of health care education at a time when global health has never been a greater priority. It also will support our vision of creating a dynamic global community of lifelong learners, empowering them to achieve their goals, find success and make inspiring contributions to the global community. Our immediate focus will be on integrating these businesses, capitalizing on the enormous opportunities this transaction presents, realizing the synergies we've identified and continuing to deploy capital efficiently. Operator, we would now like to open the call for questions.
Thank Thank you. And our first question is from the line of Jeff Silber with BMO Capital Markets. Please proceed with your questions.
Thanks so much, and good morning, everyone, and really appreciate you guys doing this call. My first question is if
you could just give us
a little bit of background. I know this is an asset that had been speculated to be sold over the course of the past few years. How long have you been looking to acquire Walden? Is this something that just happened recently? Or is this something that's been on your radar screen for a while?
Yes. I will start and ask Dee to jump in if I don't miss anything. Good morning or if I miss something. Good morning, Jeff. So as you know, we continuously look at those assets that we believe are going to be additive to our overall student outcomes and student optionality in those areas, including medical and health care, where we just see the growth and see the opportunity to serve not only students, but obviously our employer partners.
So we really view Walden University not only as the crown jewel of the Laureate portfolio, but also as a health care educator that has really top notch accreditation, has enjoyed a good relationship with the Higher Learning Commission as some of our institutions do and also aligns with the outcomes in terms of NCLEX scores are at and or above the national placement for those graduate degree students at very high rates. So when we look at them and sort of look at the whole market and think about the return on investment for students, because at the end of the day, that's what our regulators and accreditors really want to see, we saw them as a natural fit. And of course, Laureate had a pre determined sort of strategy in terms of divesting all of their institutions and businesses.
So again, is this something that you just started looking at since Laureate made that announcement earlier this year? Or had you been looking at this asset for a while?
We have been looking at this asset for some time. This was not sort of borne out of that release.
Okay. So the transaction isn't opportunistic. It's been one that would have fit our strategy for some time, particularly once we focused on the two industry verticals in health care and financial services. But obviously, once Laureate's strategy was announced, we realized that the opportunity would have ripened to really grab one of the premier health care education assets in The U. S.
Okay. Great. That's helpful. One financial question. Just looking at some of the slides you gave about the dilution in the first year, but the accretion thereafter, seems like a big jump between year one and year two.
I know you say it's solely due to purchase accounting, but I mean is there that much intangible asset amortization in that first year compared to year two, year three and year four?
Sure, Mike. I'll let you take that.
Yes. So there's really two components to the purchase accounting impact. The very first part is deferred revenue and the second part is the amortization of intangibles. The deferred revenue is actually very significant. That's the that basically is that impacts both that's the amortization of intangibles as well as the deferred revenue impact impacts year one.
When you get to year two, it's only the amortization of intangibles, and the deferred revenue impact is fairly significant. And so that's the big change in accretion between year one and year two.
That's actually really helpful. Appreciate that. Is it possible to break out those two components size wise in year one?
Yes. I mean I would say, first, keep in mind, these are preliminary estimates as to what the purchase As accounting impacts you see in the slide in the investor deck, it's about $134,000,000 in total. We're estimating that it's about $62,000,000 of deferred revenue and about $72,000,000 annually from amortization of intangibles. Okay. That's our best estimate as of this time.
That's a better estimate than I have. So I I appreciate that. That's helpful. And let me ask you a question that I've had a couple of investors ask me, so I'm just going to ask you this question. We're in an election year.
Obviously, there seems to be a lot of jitters about a potential change in administration and more focused on for profit schools. You're going to with this acquisition, I guess, be increasing your exposure to that potential negativity. Is that something that concerns you?
Short answer is no. So Jeff, a couple of reminders. So the first is that, obviously, we have been through prior administrations where we set our proactive regulatory strategy in and around making sure that the administration whoever that administration may be understands the return on investment for our students. Our academic outcomes, we always lead with those. As you know, our residency rates at ninety two and ninety five percent, our NCLEX scores at ninety two percent.
And then we also if you will also recall in the prior administration, prior to this administration, had our own student commitments where we voluntarily went to 80 fivefifteen to Title IV for Title IV funding. We are far below that now as we look at Chamberlain and some of these places where our workforce solutions provider strategy is really driving employer and corporate pay for our programs, and we see that as something that the Department of Education and the administration in general would see as very positive and, in fact, did in the former administration. And then when we combine that with the fact that this is health care and medicine and that we are driving the social impact, only of solving some of those supply pressures within that industry or a lot of those supply pressures, We have a low Title IV percentage as it relates to the overall for profit industry. And then we're also serving diverse communities, which is a part of our DNA and a part of Walden's DNA. We feel very well positioned and, in fact, have good relationships on both sides of the aisle in that regard.
Okay. Appreciate the color. Thanks so much. Yes.
The next question is from the line of Jeff Miller with Baird. Please proceed with your question.
Yes. Thank you. Good morning. Would love some more detail on the expected cost synergies. I know you gave us the number, but let me ask it in this, I guess, with this background.
One of the main areas you called out was marketing spend efficiency. And if I think back to, I think it was three years ago at Walden, when they maybe pulled back a little too hard on a subset of their marketing mix, the new enrollment really fell short pretty hard. So would love the detail on how you get to the cost synergies and especially the marketing cost synergies.
Sure. I will start and Mike can see if there's anything to add to that. Certainly, recognize where that question is coming from, Jeff, looked at that. Obviously, recently, Walden has increased their marketing spend. That being said, we certainly have very similar approaches to enrollment admissions in some of our institutions, primarily Chamberlain, but across our med health institutions and have real abilities to rationalize that media and digital channel spend as we think about doing that across the entire portfolio.
So it's really between that and some of the IT costs that are marketing related that we're going to be able to get sort of that best of spend process and best practices and reduce those costs. And they are very duplicative in many areas of the marketing and advertising spend.
Yes. And Jeff, what I would add on that is if you think about things like keywords, Facebook display ads, Instagram, marketing platforms like that, we both are purchasing the similar keywords, similar display ads. And now we'll have the ability to coordinate that purchasing and be thoughtful in terms of how to gain the greatest leverage for the combined entity. On the technology side, we leverage or we utilize many of the same technologies in terms of technology for our registrar services or other back office services. And so those are obviously tools that we can create greater scale with and use one technology for both organizations.
And then thirdly, we didn't talk about this explicitly in the prepared remarks, this is a larger organization. And we believe when you look at things from a procurement standpoint, we're going to have the opportunity to really look through all the different relationships we have really be able to capture the best of both and also generate procurement opportunities, which are captured within that $60,000,000
Got it. And then you've given us intermediate term growth profiles for segments in the past. If I look through your slides and presentation, it looks like in year four, you have free cash flow for Walden after we get through the synergy period growing about 6%. Is that the right way that you think about kind of the underlying intermediate term growth profile for Walden?
Yes. I mean I think that's several years out, but we think this ultimately will be a nice, healthy free cash flow growing additive entity to the company. So I think that's not a bad perspective to think about as you think about it.
Okay. And then just a follow-up on other Jeff's question on the purchase accounting. Just do I have it right that there's only three years of purchase accounting impact and then at that point, the amortizable intangibles are fully run off? And I guess another accounting question for you, Mike, on a similar topic. Can you just run through the cash tax asset?
Just help us size that up? And is that just the goodwill, I guess, tax benefit?
Sure. So just a reminder that our estimates on purchase accounting at this stage are still estimates. That will ultimately be finalized in the future. And so the amortization of intangibles, we've looked at similar transactions to assess what is a reasonable period and what we think that will ultimately look like. And so based on precedent transactions, the intangibles would be amortized over three years.
That is our assumption. So after you get to year four, you no longer have the amortization associated with those intangibles. On the I think you're talking about the tax step up benefit. Essentially, that's essentially created because most of what we are acquiring is intangible assets, and there is a basis step up from a tax perspective that creates increased deductibility over the next over a very long period of time, which does create cash tax savings.
And do you have the annual benefit or the present value kind of a benefit since it is long term? And I think it might be meaningful here?
What I would say is, as we look at that on an annual basis, it's probably going to be in the 25,000,000 to $30,000,000 range.
Okay. And then is there I understand you're going to keep separate institutions and accreditations and recognize the importance of that and that there's back office synergy potential. Are there certain synergy potentials, whether it's the online learning platform or, I don't know, to the extent to which you can leverage certain aspects of content? Just anything you can say in that regard.
Yes, sure. I mean there are things. And just as a reminder for folks, we actually do that already between two very distinct institutions on the medical school side. So we kind of know where those things tend to work in that. So if you think about curriculum development as an example, which is a large part of cost of instruction, that's something that there's certainly overlap and ability to get curriculum design synergies.
Sometimes with faculty spend in terms of just centralized hiring, training on these online modalities, I think that all of our ad talent as well as Walden have a very strong, not just online education, but real learning and functional adaptive learning modalities for those students that are producing better results, and we have an ability to optimize there a bit. And then just some of the transition to hybrid or more online delivery for some of the pieces of the Adtalem current offering. So I think a sort of wide range, but around curriculum, curriculum design, faculty and other areas of cost of instruction that will allow us to drive some significant synergies there.
Got it. Thank you.
Thank you. The next question is from the line of Greg Pendy with Sidoti. Please proceed with your questions.
Hi, guys. Thanks for taking my questions. I know earlier you addressed the Title IV mix, but is there anything to be aware of in terms of cohort default rates? Are they consistent with what you're seeing at Chamberlain? And maybe any impacts from if gainful employment were to come back that we should be aware of in terms of Walden?
Sure. So I'll start with cohort default rates. They are quite good and in line with the default rates that we see. Slight maybe slightly higher than Chamberlain, but certainly well below not only for profit institutions, but not for profit institutions. So that's something that we know.
Obviously, the Department of Ed is very attuned to. So we are pleased with that. Part of that goes to the next part of your question, Greg, which is in and around gainful employment. If we take a look at the actual mix of Walden programs, a large part of those are graduate. And even at that, a large percentage, almost 30%, are doctorate.
So these are current career professionals who are enabling career progress and, in many cases, either have corporate sponsors or they are doing that through part of their career and have the salaries that justify that. So we don't have the same situation where we had in prior institutions in and around programs with gainful employment in that regard, if it were to come back into sites in terms of administration change.
Great. That's helpful. And then just one more, if I can.
Just checking I mean, I
know over the past year, you spent an uptick in marketing to kind of get the message out on Chamberlain's value proposition. Am I understanding correct that maybe the key way to think of the two separate universities is exactly what you were talking about? There's just a higher mix at Walden of more of the graduate programs as far as differentiating the two names?
Yes. I mean there's obviously some program overlap because in combining the MSN as an example. But if you looked at their MSN tracks, we have five, they have eight. They also have some key ones that in community health, as an example, that would really augment what we currently have. And so as we think about kind of the ability to attract students, we really see it as something that we can do or something that we can use as a benefit for us versus much like we do with the medical schools, but even more so because of the nature of their degrees.
That's right.
Perfect. That's very helpful. Thanks a lot.
Welcome. Thank
you. At this time, I'll turn the floor back to Lisa Wardell, Chairman and CEO, for closing remarks.
Okay. Well, thank you all for your questions and for dialing in on short notice today. Once again, we're really excited about this transaction. The market positioning, scale, synergies this transaction represents will allow us to be a formidable competitor in the growing health care education market. And we're going to be able to do that while maintaining our quality academic outcomes, which is of utmost importance to us at Adtalem Global.
I know I speak on behalf of the full Adtalem leadership team when I say we look forward to welcoming Walden's talented management team and their workforce into our company, and we thank you for joining us this morning. Thank you to all
that joined us today. This does conclude today's conference. You may now disconnect your lines at this time. Thank you for your participation.