America's Most Valuable For-Profit College Has A New Plan To Go Non-Profit

Grand Canyon Education, valued at $1.6 billion, wants to spin off its university campus as a non-profit, while keeping its services business as a listed company.

The country’s most valuable publicly-traded for-profit college has hatched a complex and unprecedented plan to become a nonprofit. Grand Canyon Education told investors this week that it was trying to pull off a scheme that would essentially split the company in two — one part a nonprofit college, Grand Canyon University, and the other half a for-profit service provider.

The move, if it gets past eagle-eyed regulators, would put the company in almost wholly uncharted territory: no for-profit university, much less one valued at $1.6 billion, has ever even attempted something like it.

"This is really something new," said Trace Urdan, an analyst with Credit Suisse.

Grand Canyon's move is a sign of the times for the for-profit college business, whose publicly traded companies have taken a beating amid a regulatory crackdown in recent years. Among the largest operators, one was taken private and the other was wiped out altogether.

There are now just three listed for-profit college companies valued above $1 billion: Apollo Education, Grand Canyon, and DeVry. And Apollo, which owns the University of Phoenix, is in the process of being taken private itself. "Once Apollo and Grand Canyon go away, you're just left with the cats and dogs," Urdan said.

Grand Canyon has been trying to become a nonprofit college since late 2014, saying its reputation and ability to compete for students were being harmed by its for-profit status. But the company's first plan to accomplish that goal, by taking out a huge bond to buy itself from shareholders, would have proved far too expensive.

So the company came up with a cheaper alternative: turning the university itself into a nonprofit, but leaving the businesses that recruit students and power the school's online courses as part of a for-profit company.

The new plan requires a much smaller loan, since much of Grand Canyon's value, executives say, is tied up in the machinery that supports the school. If the newly-created nonprofit has to pay only for the value of Grand Canyon University, the price tag is much smaller.

The for-profit company would work as a contractor for the university. In an ideal world, the company would soon sell its software and know-how to other universities as well. And Grand Canyon University would lose the black mark on its reputation — its for-profit status.

"We now believe it is in the best interest of our students, faculty, and staff, the community, and our investors that we pursue a not-for-profit model," the company's president, Brian Mueller, said on the company's earnings call Wednesday. Grand Canyon's stock jumped 16% after the call.

In some ways, Grand Canyon, which bills itself as a "private Christian school," already looks a lot like a nonprofit college. It was in fact founded as one, but when the nonprofit was on the verge of bankruptcy, it was bought out by investors and turned into a for-profit. It has no history of investigations by states or the federal government, a relative rarity in the industry. It doesn't offer the technical or career-education programs that have typically gotten for-profits in trouble with the government, and that would subject it to regulation under the Obama administration's new gainful employment rules, which were set to cripple some other for-profits unless they stripped away many of their offerings.

Grand Canyon's 60,000 online students subsidize a robust and quickly-growing campus of 15,000 young people, with sleek new dorms, greens spotted with palm trees, and even a planned golf course. The university even has Division 1 sports teams; its mascot is the antelope.

That means it competes not with the likes of Phoenix and DeVry but with nonprofit schools like Arizona State University, which sits in its backyard, and Liberty, a Christian school founded by Jerry Falwell that is the country's largest private nonprofit university.

For on-campus students, Grand Canyon's tuition is about the same as ASU's in-state cost. But because it is a for-profit school in a time when many for-profits are so unpopular, the university is fighting a "public relations battle," said Urdan: "they have real difficulty with marketing to high school students." The president of ASU, Michael Crow, vaunted as an innovator in education circles, has gone on something of a crusade against Grand Canyon, barring ASU's sports teams from playing against the Antelopes.

"They are a service industry — a profit-seeking service industry. We are an education and research enterprise," Crow told the Phoenix Business Journal. "They're not the same, and I want to be very clear about that."

But some investors are skeptical of Grand Canyon's plan. At the company's annual investor day Thursday, many worried that the new company formed after the split, a student-services company, would not be nearly as lucrative, said Jeffrey Silber, an analyst at BMO Capital Markets, in a note. The only publicly traded company that would be comparable to the new Grand Canyon, 2U, has seen its stock slide since December.

Perhaps more threatening to Grand Canyon's plan is the authorities, namely the IRS, which will examine the new, nonprofit university to make sure it is fully independent of the for-profit company. That could be a tough sell, given that it will be providing the bulk of the university's services. The deal would also have to get by the Education Department, which has indicated it would be heavily skeptical of any plans for for-profits to go non-profit.

"My view is that it's a lot more complex than investors realize," Urdan said.

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