Harcourt Bids $740 Million to Buy NEC
Publisher and retailer Harcourt General Inc. launched an unsolicited $740-million bid Wednesday for Irvine-based National Education Corp., upping the ante as it starts a fight to buy the world’s largest correspondence school.
Harcourt’s plan to go to NEC shareholders with a $19.50-a-share tender offer surpasses the all-stock deal NEC directors reached last month with Sylvan Learning Systems Inc. in what was billed then as the “biggest deal in the history of the industry.”
The initial value of Sylvan’s offer, which NEC’s board has accepted, was $675 million, but a drop in Sylvan’s stock price since its March 12 offer has reduced the value to $663 million.
The agreement with Sylvan spurred Harcourt to make its unsolicited bid for the revived Orange County education firm, Harcourt executives said.
“We hope it’s going to be friendly,” Harcourt spokesman Peter Farwell said about the offer. “We recognize that they are in a merger agreement and couldn’t have discussions with another party. But we’re committed to going forward.”
NEC said it will review Harcourt’s offer and try to respond before the Boston-area company makes the tender offer effective, which Farwell said would occur within five days. Executives at Sylvan’s Baltimore headquarters weren’t available for comment.
Analysts were split in their views of the competing bids, but agreed that a higher price will likely be coming.
“It’s nice to be loved,” said analyst Michael T. Moe of Montgomery Securities in San Francisco. He talked with numerous NEC shareholders Wednesday and said: “All of them are happy they’ve got another suitor, even if they like Sylvan. At the end of the day, they win either way.”
Wall Street, which battered both Sylvan and NEC a month ago, apparently liked Harcourt’s entrance on the scene. The stocks of all three firms rose, with NEC gaining the most--$4.375--to close at $19.375 a share. Harcourt closed at $45, a $2.125 increase, and Sylvan rose $1 a share to close at $30.125.
Harcourt considered buying NEC two years ago, and executives at the two companies had several conversations, Farwell said. But the Irvine firm had lost $150 million over the previous nine years and hadn’t turned the corner yet, so Harcourt passed, he said.
NEC changed its management and, led by Sam Yau as its president, began one of the more remarkable comebacks of recent times. Early on, analyst Stephen D. Weinress of Irvine’s L.H. Friend, Weinress, Frankson & Presson saw the changes coming and began recommending NEC stock. The brokerage’s customers now own about 10 million of NEC’s 38 million shares.
“We felt that, with or without a deal, NEC is a good company,” Weinress said. “And for Sylvan shareholders who feared they were overpaying, they’ve got to realize that Harcourt’s offer for NEC validates what Sylvan management was saying: NEC is a premier player in business.”
Harcourt recognized that as soon as the Sylvan deal was announced, according to a letter to Yau from Harcourt Chairman Richard A. Smith. Following that news, Smith wrote, Harcourt “conducted an intensive strategic review” and concluded that “the advantages of combining our two companies are too compelling to ignore.”
Harcourt, which owns the Neiman Marcus and Bergdorf Goodman stores along with its Harcourt Brace book publishing house, has long been a major supplier of school textbooks. But it has wanted to expand to offer correspondence courses, computer training and supplemental materials like workbooks. Those are NEC’s three major operations.
Harcourt expects that its high school and college texts would “flow through” NEC’s courses, Farwell said, and that NEC’s materials would be used by Harcourt’s traditional school customers.
“We’re not going to cut a lot of costs to create value,” he said. “We see a lot of opportunity to enhance revenues on both sides.”
Should Harcourt be successful, it also would seek to acquire shares in NEC’s Steck-Vaughn Publishing Corp. subsidiary. NEC owns 83% of Steck, and Harcourt would offer $14 a share for the remainder.
Harcourt also would end up covering a $30-million payment NEC would have to make for breaking its agreement with Sylvan, Farwell said.
Sylvan is also looking at NEC as a strategic partner, providing content to Sylvan’s distribution network. Sylvan has 650 tutoring centers nationwide for students from kindergarten through 12th grade.
Analysts Weinress and Moe like the Sylvan deal better, mainly because the companies appear to fit together better and would create a pure vocational services company. A stock swap also avoids tax consequences.
Analyst Charles Baker in the San Francisco office of Salomon Brothers Inc. likes the Harcourt deal because NEC fits just as well with the $3-billion company and Harcourt has a much greater ability to expand NEC’s operations. Besides, the cash payment with taxes incurred has more value to institutional shareholders, who own 85% of NEC.
