After the close of trade on Monday, SEEK Limited (ASX: SEK) spin-off IDP Education Limited (ASX: IEL) announced it has entered into an agreement to acquire 100% of UK-based Hotcourses Limited.
On Tuesday, shares in IDP Education reacted positively to the news, surging 8% (at the time of writing). Nevertheless, with the stock down almost 17% from recent highs, the key question is whether the new acquisition will see IDP Education retest last September's highs?
Here's my view.
About IDP
IDP Education provides a vertically integrated service of connecting international students with leading Australian universities through its three operating segments of student placement services, IELTS testing, and English language teaching.
The company listed on the ASX in December 2015 at $2.65 per share, after SEEK divested its 50% co-ownership stake.
IDP Education remains 50% owned by Education Australia (a co-operative of 38 Australian universities), meaning it maintains strong ties to education industry bodies.
The Hotcourses acquisition should allow it to leverage these links.
Hotcourses acquisition
Hotcourses' highly complementary operations mean Monday's announcement of the acquisition should strengthen IDP Education's position in the market, in my opinion.
According to the release, Hotcourses owns and operates a portfolio of education search websites that help future students make the right choices and connect with universities and colleges around the world. Put simply, it's a virtual agent platform for prospective students to find study opportunities abroad.
In my mind, the acquisition aligns well with IDP Education's existing operations and provides it with compelling growth exposure in the UK student market.
With Hotcourses boasting over 66 million unique visits every year, IDP Education should be able to maintain Hotcourses' individual brand identity, whilst harnessing natural synergies and realising new opportunities as a result of the group's combined breadth in the international placements markets.
Is it a buy?
The Hotcourses acquisition will cost GBP30.1 million and will be funded using debt. Hotcourses is expected to generate GBP10.8 million (approximately A$18.0 million) in continuing revenues, representing an attractive valuation for the business.
When compared to IDP Education's 2016 full-year revenues of A$361.6 million, the new business will represent approximately 5% of group revenues. More impressively, however, the acquisition should lift full-year global revenue (ex-Australasia) to almost $89 million, or 25% of total revenues, all else being equal.
Importantly, this shift away from Australian sourced revenues positions IDP Education to be insulated against a slowdown in the Australian education sector and better diversifies its operations.
Accordingly, the acquisition looks to be game changing for IDP Education.
Foolish takeaway
With IDP Education's shares changing hands at 50% more than their listing price, I believe the trailing price-earnings of 26x is beginning to look expensive for this stock.
Nevertheless, with Monday's acquisition set to be earnings per share accretive from 2018, IDP Education should be able to increase earnings organically in due course. Therefore, it definitely remains one to buy at the right price.
That being said, given Tuesday's strong rally, I'd wait for a pullback before jumping in.
