Kroton plans make its first acquisition of basic-education school this year. The education company is holding talks with 16 schools and negotiations have reached due diligence efforts in three of them.

Brazil’s leading for-profit college, with a market share of around 15%, wants to attain the same share in so-called premium schools by 2022, according to people familiar with the business. Premium schools charge monthly tuition of over R$1,200. The tuition rises to around R$2,000 in São Paulo state and Rio de Janeiro. The R$25 billion a year premium school market generates 44% of the industry’s revenue.

The strategy adopted by Kroton is to purchase recognized brands in several states, expanding them and opening new units in the school’s market. The company wants to start with 600 students, rise that number to 900 in the second year of operation and enroll 1,200 to 1,400 students by the third year, which then would allow an operating margin of 30%.

Kroton wants to use the strategy for its Pitágoras school in Minas Gerais. It currently operates a single school of the brand in Belo Horizonte, in addition to a learning system adopted by around 220,000 students in 672 Brazilian schools.

But the real targets of Kroton are markets lacking premium-school options, which automatically sidelines the city of São Paulo. Grupo Eleva, controlled by 3G Capital founder Jorge Paulo Lemman, appears to be following the same path. Sources said Eleva recently purchased Nota 10, a premium school with units in three cities of Mato Grosso do Sul.

Around 6,300 schools throughout Brazil operate in the R$1,200 range of monthly tuition. Bain & Company data also show there are only 49 schools with more than 2,000 students, driving investor interest in the assets.

The possibility of offering extracurricular courses for the spare part of the school day also drives interest. This market generates R$40 billion a year. Kroton plans to offer English lessons and homework assistance, in addition to other activities including sports in partnership with specialized schools.

Kroton will not operate in the “super-premium” school market – the segment in which the likes of SEB and Eleva are betting strongly – where tuition costs around R$5,000 a month. On Tuesday SEB opened a unit of its premium school Concept in São Paulo, in the former building of Sacré-Couer school, which consumed investments of about R$75 million.

Source: Valor Econômico