New actions by two online education providers mark latest consolidation steps following China’s crackdown on after-school tutoring

  • Rise Education has announced a deal that appears to pave the way for a delisting from Wall Street
  • In a separate development, Spark Education has formally withdrawn its plan from June to list shares in New York

By Doug Young

Education is rippling through the China business headlines again with new developments from several companies. The most-interesting comes from Rise Education (REDU.US), which has just reached an agreement that looks like a prelude to a delisting that will provide meager compensation for its largest shareholder. Separately, Spark Education, which filed to list in New York back in June, has formally withdrawn its IPO application.

Last but not least, China East Education Holdings Ltd. (0667.HK), which is one of the few players that should be relatively unaffected by the government-led cleanup that has decimated the sector, has announced one of its directors is unloading a large chunk of his shares at a big discount. That would seem to indicate that even players less-affected by the sector-wide cleanup are feeling some heat as the government-led “double reduction” campaign winds down.

For those who haven’t followed the issue closely, China’s private education sector was one of the earliest to come under fire in a series of government campaigns to tighten the reins on various high-tech industries this year. In this case, the government was cracking down on companies that offered after-school tutoring services, many of those online, for primary students in areas like math and English included in their core curriculum.

The campaign was aimed at relieving the pressure on students, and forbid the offering of after-school tutoring services for core curriculum subjects on weekends, public holidays and over the long summer and winter vacations. It also banned for-profit companies from offering such services, which basically forbid public listings for any such companies.

Some companies like Gaotu Techedu (GOTU.US) and Koolearn (1797.HK) have chosen to shift their focus to material that is still allowed on a for-profit basis, such as courses in non-core curriculum subjects like arts and music, and adult education. But a number of others like OneSmart (ONE.US) appear to have decided to thrown in the towel, at least in terms of continuing as a listed company.

Rise Education falls into the latter category, and first announced its intent to transfer all of its assets to an acquirer in late October in a cashless transaction. The end for the company as a listed entity appeared to take a step forward a couple of weeks ago when Rise announced that Ernst & Young had resigned as its auditor due to lack of clarity about its future.

Now, Rise said on Wednesday it has entered a final agreement with the buyer group. The deal looks relatively complex, and we’d recommend anyone wanting to get all the details read the announcement. But the key part appears to be the reaching of an agreement with Bain Capital, which currently holds 62.7% of Rise’s shares.

Under that deal, Bain has agreed to provide the buyer group with a $17 million loan. The buyer group then has the “option” to convert that loan into Rise’s American depositary shares at a conversion price of $0.70 per ADS. Bain currently holds the equivalent of 35.4 million Rise ADSs, which would be worth nearly $25 million at the conversion price.

Thus Bain would get $25 million from the buyer for its ADSs in exchange for its $17 loan, meaning it would net $8 million in the deal.

Big Losses

Bain is a longtime Rise shareholder, holding its current stake since the company’s 2017 IPO. The stock once traded as high as more than $17 when education shares were all the rage, profiting from Chinese parents eager to give their children an edge in the country’s competitive education system.

That means Bain’s current stake would have been worth as much as $600 million at one point. The $8 million it will ultimately get from this sale isn’t much, and represents a huge loss that most in the sector are now facing. But in this case the company probably didn’t have much leverage to negotiate a better transaction.

Next, we’ll look at Spark Education, which had the misfortune of filing for its U.S. IPO in June just as the education crackdown was building momentum. The IPO then went silent, as China went on to announce details of the cleanup that we’ve described above.

Now Spark has finally spoken up on the matter, saying it has formally withdrawn the application, according to a new U.S. stock exchange filing dated Dec. 1. “In light of the current capital markets condition, the company is considering other alternatives and has determined not to proceed at this time with the offering and sale of the securities proposed to be covered by the registration statement,” it said in the brief statement announcing the withdrawal.

While this development is hardly unexpected, it’s slightly interesting that Spark decided to make this kind of formal withdrawal request at all. That’s because companies that abandon IPOs after filing prospectuses often just fail to file additional documents and quietly abandon the plan without a formal announcement. Thus Spark’s declaration may indicate it will join the camp of companies that intend to find a way forward under the new private education landscape.

Last, but not least, there’s China East Education, whose business of providing vocational courses for adults in areas like cooking and computer services lies outside the scope of the crackdown, meaning it shouldn’t be affected. Despite that the stock has lost more than half of its value since May, as investors perhaps worry that private vocational schools could become victim of a future cleanup.

The shares sagged just a bit more this week, losing about 14% of their value over the last two trading days, after the company disclosed that its deputy chairman and executive director Xiao Guoqing had hired BNP Paribas Securities to sell 33 million of his shares, accounting for 1.52% of the company’s total, for HK$7.16 per share.

The stock was trading at HK$8.14 before the announcement, meaning Xiao was selling his shares at a 12% discount. We probably can’t fault him too much, since his shares have already lost so much of their value this year. But it’s never very comforting when a top executive starts selling a big portion of his stake in his company.

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