April 23, 2018 / 4:39 PM / 7 months ago

UPDATE 6-Kroton nabs Somos for up to $1.8 bln in Brazil education deal

(Adds closing share prices, competitive context)

By Gabriela Mello and Jake Spring

SAO PAULO/BRASILIA, April 23 (Reuters) - Brazil's largest for-profit education firm, Kroton Educacional SA, resumed its buying spree with an acquisition of Somos Educação SA for up to 6.3 billion reais ($1.8 billion), making a bold move into educating children after antitrust regulators knocked down a major university merger.

The deal gives Kroton control of the only listed company focused on elementary and high school education and shows its merger appetite has not vanished since competition watchdog Cade blocked a deal with Estacio Participações SA in June.

Kroton said it had agreed to acquire a 73 percent stake in Somos from controlling shareholder Tarpon Investimentos SA for 4.6 billion reais and would offer to buy out minority shareholders and delist the company.

Kroton shares rose 5 percent, Tarpon jumped 29 percent and Somos soared 49 percent on the deal, which offered a rich premium to lock up an attractive asset in the education sector's hottest new segment for dealmaking.

For-profit education groups, which have filled the gap left by Brazil's poorly run public schools, have shifted their focus to early education this year after government-funded college loans went on the chopping block to curb public deficits.

The problem in the segment is the small size of targets, sometimes owning only one or two units, in a very fragmented sector. Kroton's first acquisition in the pre-college segment was the purchase of Centro Educacional Leonardo Da Vinci earlier this month for an undisclosed value.

Chief Executive Rodrigo Galindo told analysts a third deal would soon be announced, plus Kroton was in advanced talks to strike a fourth deal in the segment.

The Somos deal will lift Kroton's revenue by 30 percent, boosting elementary and high school education to 27 percent of its revenue, from 3 percent currently, Galindo said.

Kroton agreed to pay 23.75 reais per share, a 66 percent premium on Somos' Friday closing price.

Galindo said Kroton will use debt to fund the Somos deal, and said the company's net debt may reach two times its earnings before interest, taxes depreciation and amortization (EBITDA).

"Somos Educacao is a gem and we are confident we've taken the right step," Galindo said.

In December, Galindo laid out an aggressive expansion plan including opening 180 undergraduate programs in 2018 as well as acquisitions in Brazil and abroad.

Galindo said there was little market overlap between its current education programs and the schools run by Somos, but he noted that the deal would give Kroton roughly a fifth of the market for learning systems, which antitrust authorities would need to evaluate.

Cade declined to comment.

For Brazilian buyout firm Tarpon, the sale of its education company is a welcome windfall, as a major investment in food processor BRF SA has suffered heavy losses and fraud allegations, stoking tensions among shareholders.

BRF shares are down 38 percent over the last 12 months. Tarpon shares had lost 37 percent in the same period, before Monday's news.

$1 = 3.44 reais Additional reporting by Carolina Mandl, Leonardo Goy, Bruno Federowski and Tatiana Bautzer; Editing by Brad Haynes, Paul Simao, Scott Malone and Richard Chang

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