Phoenix deal offers ‘more than enough’ to cover student-loan risk, says U of I president

The University of Idaho remains intent on completing its high-profile acquisition of the University of Phoenix for hundreds of millions of dollars, which also comes with a possibility of millions more in financial liabilities in the deal.

Terms of the $550 million agreement require the University of Phoenix to provide $200 million in cash at close to a nonprofit, Four Three Education, created to oversee the school and its transition away from a for-profit college. The new nonprofit would tap those funds to cover potential financial liabilities, which could include student loans that the federal government may forgive from past fraud claims against the primarily online education program.

The $200 million left over in the purchase should be “more than enough” for the nonprofit and its board of trustees, which would operate independent of the two universities, to manage those variable expenses, U of I President Scott Green told the Idaho Statesman. With other undefined “financial tools” also in place to account for the outstanding student-loan debt, Green said he feels comfortable with the level of risk in the deal.

“No. 1 is $200 million of cash,” he said in a video interview with the Statesman last month. “That’s really what that’s there for. There’s no other reason to carry that much cash unless you want to make sure that your balance sheet is bulletproof against any of these contingencies.”

Just how much those paybacks could total, though, contingent on the U.S. Department of Education’s decision to forgive University of Phoenix student-loan debts – or for how many years – is unclear.

University of Phoenix leaders have said they expect the financial hit from student-loan costs to be about $1.5 million per year, according to a U of I FAQ page about the acquisition. U of I officials think it could be more, with Green acknowledging some consultants outside of the review process have made estimates closer to $7 million per year.

“I tend to think about worst-case, and so I want a multiple of that, right?” Green said. “So we want to make sure that we could cover any contingencies that come up. That may be their evaluation, but I’ve relied on experts and I think that we’ve got very, very good coverage of those types of liabilities.”

Green declined to offer the annual student-loan liability estimate from the consultants the U of I hired to review the agreement. He also didn’t directly answer a question about how many years Four Three may have to reimburse the Department of Education.

‘World-class advisers’ steer U of I due diligence

In September, three U.S. senators wrote Green about the for-profit college’s “pattern of predatory and abusive behavior,” and warned him again of the possible liabilities tied to the student-loan debts that the University of Phoenix’s future operator could have to reimburse. Green responded – as did Gov. Brad Little – and highlighted the U of I’s “careful due diligence” process overseen by “world-class advisers.”

The U of I conducted two months of due diligence with a team of consultants before presenting the acquisition proposal to the Idaho State Board of Education, which unanimously approved the deal to affiliate with the University of Phoenix in May. Green said the hired experts included: Boise-based law firm Hawley Troxell, Washington, D.C.-based law firm Hogan Lovells, as well as PFM Advisors, Rieth Jones Advisors, Citibank and an unidentified “Big Four” accounting firm.

So far, the U of I has spent about $7 million from reserves on the due diligence work, Green said. That money would be recouped only if the agreement is finalized, Green told the Statesman.

“We got the best we could find,” he said. “I would rather spend $7 million to ensure we don’t make a mistake than invest $2 million in due diligence by some Joe fly-by-night shop that would give us an opinion, and then we enter a deal that we don’t really know what we’re getting.”

The University of Phoenix acquisition remains at the center of an open meetings lawsuit brought by Attorney General Raúl Labrador, with the trial scheduled to start Monday. If it overcomes the lawsuit and clears all regulatory approvals, the deal calls for issuing a total of $685 million in nontaxable and taxable bonds to cover the purchase price, plus expenses – such as due diligence costs – for both the U of I and University of Phoenix to bring the deal to bear.

Recent modeling shows the University of Phoenix is generating more than $150 million in profits each year, Green said. Combined with the $200 million in cash at Four Three’s disposal to handle the potential student loans forgiven by the federal government that it could be forced to pay back, he said the looming acquisition plans accordingly to land the nonprofit on firm ground.

“We’ve had a lot of really talented people advising us and really getting into the financial statements and understanding the risks,” Green said. “We feel pretty good that the $200 million plus the other things that we’re doing to mitigate risk, including our compliance systems, will help us get there.”