Megastudy's success story ends

Online education firm seeks new owner

By Kim Tae-jong

The success story of Megastudy is drawing to a close. The nation's largest online education service provider is seeking a new owner to continue its legacy.

The move came as the nation's ever-growing online learning market continues to change with a series of setbacks such as tightened state regulations, a falling student population, and the prolonged economic slump.

Megastudy recently announced that it is up for sale. Son Ju-eun, CEO and the largest shareholder, and Korea Education Holdings, the second-largest shareholder, said they selected Morgan Stanley as the advisor for the merger and acquisition.

The two major shareholders have 23.35 and 9.21 percent stakes in the firm, respectively. Whoever purchases their stocks will become the largest shareholder ― the new owner, will also have management rights.

The bidding price was initially estimated to reach 300 billion won, which includes the premium for the management rights.

Some foreign private equity funds (PEFs) and local education firms have shown interest in the takeover, as the firm has posted an annual operating profit of over 50 billion won in the past couple of years ― 59.2 billion won in 2012 and 50.2 billion in 2013.

"Some foreign PEFs have asked us about the firm, but they seem to prefer to work with local strategic investors for the acquisition," an official from an investment bank said, declining to be named.

"Local education service providers also seem to think the deal is attractive if they want to expand their business scope."

Market insiders said that the firm has a healthy financial structure but its business model has failed to catch up with market trends.

"Megastudy is a leading online education provider with a relatively good financial structure," Park Shin-ay, an analyst at Daishin Securities, said. "This year, the firm is expected to perform slightly better."

Some market insiders are skeptical of the takeover deal given the market conditions and expect the final price to be under 200 billion won.

The combined price for the stocks of the two largest shareholders is about 150 billion won, with each share valued at about 70,000 won and the premium for the management rights not likely to surpass 20 billion won, they said.

"Whoever acquires the firm will face difficulty increasing profits," Kim Mi-yeon, an analyst at Eugene Investment & Securities, said. "The new owner will need to come up with a new business model in order to improve sales performance."

She pointed out that the biggest challenge that the firm has faced is a significant drop in the number of online subscribers due to a free program by the education ministry.

The Ministry of Education started to offer classes through the Educational Broadcasting Service (EBS) in 2004 and has made the lectures and materials delivered by the state-run educational broadcasting network the main resource for the College Scholastic Ability Test (CSAT) in an effort to cut down on the nation's enormous spending on private tutoring.

Industry insiders are also concerned that Megastudy may perform poorly after the sale.

They said that Son's departure will directly affect the firm's earnings, which in turn may prompt many popular instructors to leave the firm. The performance of the firm is significantly affected by its so-called "star" instructors.

Another negative factor surrounding the deal is the fact that private equity firm H&Q, which invested in Megastudy through Korea Education Holdings, is also trying to sell its stake.

Investors may take this to mean that the company does not expect Megastudy's stock to increase in the near future.

At the time of H&Q's investment, Megastudy's stock price was around 110,000 won. The stock price, which once reached 389,900 won per share in April 2008, plunged to 68,700 won Monday.

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