According to UNESCO, in 2004 the Brazilian market for higher education was the sixth largest in the world, with approximately 3.6 million students. By 2008 the number of students enrolled in Brazilian higher education institutions had risen to 5.1 million, an increase of over 40%. Even so, this represents only 20% of the potential Brazilian student market.
With the warming of the Brazilian economy and an increase in the overall income of the population, the education sector in Brazil is undergoing a phase of burgeoning development. This promising market is worth over R116 billion per year (approximately $72.5 billion), with room for more.
Education is a focal point for the Brazilian Government - a couple of years ago it launched a programme called PROUNI ('university for all'), which offers tax exemptions for private higher education institutions in exchange for scholarships. Under the scheme, private institutions benefit from a significant reduction in their taxes, while being able to deliver even better results for their shareholders.
The opportunities available in the Brazilian higher education sector are clear. The sector, which has previously been characterised by fragmentation, is experiencing a trend for consolidation. As such, the number of transactions involving the acquisition of private institutions has boomed, as a result of both the entry of new players in the Brazilian market and the incorporation of smaller businesses into companies with a professional management structure, leading to economies of scale.
As a general rule, mergers and acquisitions of private higher education institutions are no different from those carried out in other sectors - there is usually a due diligence phase for assessment of legal, fiscal and accounting contingencies, followed by a negotiation phase, culminating with the drafting and execution of a definitive private agreement.
The most frequent liabilities found in Brazilian companies - especially in family businesses or companies run by non-professional management boards, as is the case for a large number of Brazilian private education institutions - relate to tax or labour aspects.
While an asset acquisition may seem to be the most appropriate solution to overcoming these contingencies, in practical terms it is not that simple, due to legal succession risks and a complex set of regulations from the Ministry of Education. The ministry imposes rules on conducting business for higher education institutions, as well as for the obtainment, maintenance and transfer of academic licences and accreditations. Depending on how the transaction is structured, the ministry's prior consent may be required for the transfer of the business to a third party.
Considering that public bodies in Brazil are known for being overly bureaucratic, and that both performing such a transfer and initiating a process of accreditation from scratch with the ministry are time-consuming procedures, carrying out a straightforward stock acquisition has proved to be the most effective way of either consolidating or entering the Brazilian market, despite the contingencies of the target that the purchasing company is led to undertake.
In this case the deal is not conditional upon the ministry's prior approval - instead, the ministry must be notified of the deal after completion. Therefore, once the target has been acquired, the purchaser can continue with its business forthwith.
While this may explain the rationale behind the large number of M&A transactions that have taken place in the last 10 years, there is certainly more to come and to be said on the matter.
For further information on this topic please contact Rodrigo Millar de Castro Guerra or Luciane Fischmann at Lobo & de Rizzo Advogados by telephone (+55 11 3702 7000), fax (+55 11 3702 7001) or email ([email protected] or [email protected]).