Education groups Afya, Yduqs advance toward potential combination - Valor International

Education groups Afya and Yduqs are in advanced talks toward a potential business combination. German group Bertelsmann, which controls Afya, has an exclusive dealing agreement through the end of the month—and plans to finalize the transaction by then—with a deal potentially being reached as early as this week, according to information obtained by Valor.

The terms are largely defined, with negotiations currently focused on a few issues, including governance. The next step is expected to be a shareholder vote.

Afya would hold a majority stake in the combined company. Although the two companies have similar earnings before interest, taxes, depreciation, and amortization (EBITDA), Afya generates more cash and has lower debt.

In the first half, Yduqs had leverage of 1.55 times EBITDA. At Afya, the ratio was below 1 time, and the company had R$1 billion in cash.

There is also a difference in market capitalization. Yduqs—owner of Estácio—is valued at R$2.4 billion on B3, while Afya has a market capitalization of $1.2 billion, or R$6.5 billion.

The transaction would involve taking Afya private on Nasdaq, where the medical education-focused group has struggled with liquidity. The combined company would remain listed on B3, Brazil’s stock exchange.

The combination would create an education group with nearly 5,900 medical-school seats, equivalent to a 15% market share, according to estimates by Itaú BBA.

Citi calculations show potential synergies of about R$835 million, assuming a 10% reduction in overhead and administrative expenses.

On the Yduqs side, the two largest shareholders are Advent, with about 15%, and the Zaher family, with roughly 12% of the company. Both have been shareholders for many years. The private equity firm invested in the Rio de Janeiro-based group in 2017, after a proposed merger between Estácio and Kroton failed to go ahead. The Zaher family—owner of SEB—has been a shareholder since 2013, when it sold one of its colleges and received part of the payment in Estácio shares.

German group Bertelsmann holds about 65% of Afya’s voting shares and 34% of its total capital. Afya is the leader in Brazil’s medical education market, with 26,400 students enrolled in medical programs.

Medicine has the sector’s highest profitability margins because it operates in a market that for many years benefited from strong student demand, high tuition fees, and low default rates.

However, litigation over medical-school openings has brought a large number of new seats to the market, and the government ultimately canceled the third edition of the Mais Médicos program. Afya had planned to apply for 1,380 seats under the program in 23 cities across Brazil. The Education Ministry canceled the program, mainly because of a shortage of beds in the public health system, or SUS, for practical training, as those beds had been taken up by students enrolled in programs created through court rulings.

Bertelsmann executives were in Brazil again this month for meetings with shareholders and banks.

According to sources, the initial discussions took place between the two groups’ CEOs, with the approach coming from Afya CEO Virgílio Gibbon.

Amid uncertainty over the economic outlook, which affects demand for higher-education enrollment, the parties moved ahead with the negotiations.

For Afya, there is an interest in diversifying an operation focused on medicine, a business that is likely to face margin pressure as competition increases from medical programs created through court orders. In addition, most of Afya’s programs have already reached maturity, meaning classes are nearly full, and there is little room for further revenue growth.

At Yduqs, meanwhile, some medical programs have yet to reach their final year. The group also owns Ibmec, a premium economics and business school that helps diversify its operations and is less exposed to economic downturns. The company, however, is affected by high household debt.

Contacted by Valor, the education groups maintained the positions they disclosed in a notice of material fact filed last month.

Yduqs said there were “ongoing discussions regarding a possible business combination, but at this time there is no additional information to provide.” The company added that its permanent objective is to create more value for the business and that it “always monitors and carefully evaluates new market opportunities.”

At the time, Afya confirmed the substance of Yduqs’ filing and said that, as of then, there was “no agreement, contract or binding commitment entered into, nor has any obligation been assumed by Afya, Yduqs or any of their respective shareholders or management teams in connection with any potential transaction.”

The Zaher family said it would not comment on the matter, while Advent did not immediately respond.

This article was translated from Valor Econômico using an artificial intelligence tool under the supervision of the Valor International editorial team to ensure accuracy, clarity, and adherence to our editorial standards. Read our Editorial Principles.