Case 036Capital allocation and corporate actionsCore

How would you IPO a school? Vidhyora Schools has EBITDA of Rs 150 crore and net debt of Rs 200 crore; at 20x EV/EBITDA it raises Rs 600 crore of new money and the promoter sells Rs 400 crore. Work out the post-money value, the dilution and the free float.

Wellington ManagementBoston · 2024

The situation

Vidhyora Schools runs 40 private K-12 schools. Fees are collected at the start of each term, occupancy is 85%, and EBITDA is Rs 150 crore. Net debt is Rs 200 crore. The promoter family owns 80% of the 28 crore shares and an early private investor owns 20%.

The bankers propose an IPO at 20x EV/EBITDA. The offer has two parts: Rs 600 crore of new shares, to fund ten new schools at about Rs 60 crore each, and Rs 400 crore of existing shares sold by the promoter family. The early investor does not sell.

Your task

What is the IPO price per share, what does the company look like after listing, and how would you judge whether the IPO is a good deal for new investors?

Quick check

Which part of the offer dilutes the existing shareholders' ownership of the company?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

At 20x, Vidhyora's enterprise value is Rs 3,000 crore and its pre-money equity Rs 2,800 crore, so the IPO price is Rs 100 a share. Rs 600 crore of new money buys 6 crore new shares, taking the count to 34 crore and equity to Rs 3,400 crore; that dilutes every holder by 17.6%. The promoter's Rs 400 crore sale dilutes no one. After listing the promoter holds 54.1% and the public 29.4%.

Step 1Where do you start when someone asks how you would IPO a school?

Start with what a buyer is paying for. A school collects fees before it teaches, keeps a student for up to fourteen years and fills seats over five or six years after it opens. Those three features, cash in advance, long customer lives and a visible ramp-up, are what justify a high multiple, so an IPO pitch for a school starts with them before any number. Then value it: 20x EBITDA of Rs 150 crore is an enterprise value of Rs 3,000 crore; less Rs 200 crore of net debt, the equity is worth Rs 2,800 crore before any money comes in, Rs 100 on each of 28 crore shares.

Step 2What do the two parts of the offer do?

A primary issueNew shares issued by the company in an offering; the money goes to the company and the share count rises. and a secondary saleExisting shares sold by current owners in an offering; the money goes to the sellers and the share count does not change. look identical to the buyer, who gets shares at Rs 100 either way. They are opposite for the company: Rs 600 crore of new shares brings cash in and enlarges the share count, while Rs 400 crore of the promoter's shares brings nothing in and changes only who owns what. Enterprise value does not change at listing; net debt of Rs 200 crore turns into net cash of Rs 400 crore, and equity rises to Rs 3,400 crore.

Of the Rs 1,000 crore IPO investors pay, Rs 600 crore buys new shares and goes into Vidhyora to build ten schools, while Rs 400 crore buys the promoter family's existing shares and goes to them; enterprise value stays at Rs 3,000 crore.

	Before	After
Enterprise value, Rs crore	3,000	3,000
Net debt (cash), Rs crore	200	(400)
Equity value, Rs crore	2,800	3,400
Shares, crore	28	34
Price per share, Rs	100	100
Promoter family	80.0%	54.1%
Early investor	20.0%	16.5%
Public float	0%	29.4%

After the IPO Vidhyora has Rs 3,400 crore of equity on 34 crore shares, still Rs 100 a share, with the promoter at 54.1%, the early investor at 16.5% and the public at 29.4%.

Issuing 6 crore new shares cuts the promoter from 80% to 65.9% and the early investor from 20% to 16.5%; the promoter's sale of 4 crore shares then moves the promoter to 54.1% and lifts the public float to 29.4% without touching the investor.

Step 3How would a new investor judge whether the IPO is worth buying?

Ask whether the new money earns more than it costs. Ten new schools at Rs 60 crore each that mature to Rs 6 crore of EBITDA apiece add Rs 60 crore of EBITDA, worth Rs 1,200 crore at 20x, but only after five years; discounted at 12% that is about Rs 681 crore today against Rs 600 crore spent. The margin is thin and depends on the schools filling on time. Then ask why the promoter is selling Rs 400 crore at this price, and check that the offer leaves enough float for the stock to trade; India sets a minimum public shareholding for listed companies, so confirm the current SEBI threshold before building the structure around it.

Where candidates lose it

The common loss is treating the whole Rs 1,000 crore as dilution. Only new shares change the share count; the promoter's sale is a change of owner, and saying otherwise tells the interviewer you do not know where IPO money goes.

The second is adding the Rs 600 crore to enterprise value. New cash sits on the balance sheet, so equity rises by Rs 600 crore while enterprise value stays at Rs 3,000 crore until the schools are built and earning.

What the interviewer asks next

The bankers suggest pricing at 18x to leave something for new investors. How much less does the promoter receive?
Why do school businesses tend to have negative working capital?
What would you want to see in the prospectus about the ten new schools?
How would you value a school chain if you could not use a multiple?

Asked at Wellington Management, Equity Research, Boston, 2024 (Wall Street Oasis): How would you IPO your school?

Company names and figures are illustrative.