The University of Arkansas System board of trustees voted Monday against moving forward with a license agreement with the University of Phoenix, but that doesn't mean the deal is dead.
At a special meeting, trustees voted 5-4 against a resolution supporting the deal, with one trustee, Kelly Eichler, abstaining.
Little Rock attorney Kevin Crass was among the trustees who voted against the resolution, raising concerns that the proposed affiliation, as currently written, would limit the UA System's right to leave the agreement until the final year of the 10-year deal.
Crass, the newest member of the 10-member board, was also skeptical about the system's ability to take action on disagreements with the University of Phoenix, as the system would hold a minority role on an 11-person board controlling the school.
Under a plan being considered by UA System President Donald Bobbitt, the UA System formed a nonprofit in August called Transformative Education Services Inc., or TES, that would acquire Phoenix, a for-profit online university with about 75,000 students, from its private owner, Apollo Education Group Inc. of Phoenix.
Under the agreement, no public money or UA System funds would be used to purchase the university, whose classes cater to working adults seeking to earn degrees.
Bobbitt has touted the deal as beneficial to a university system that’s seeing less money from state government and the prospect of declining enrollment in the near future. He said an affiliation agreement with the University of Phoenix would provide the system with $20 million per year that the board could use for any purpose.
Bobbitt has said that a statement of support from trustees isn’t a requirement to move forward with the deal, because the UA System itself wouldn’t be acquiring the University of Phoenix. He said he has the authority to contract on behalf of the UA System.
“But this particular case, I felt, and others felt, that the board be in on this particular decision,” Bobbitt said in a board meeting last week.
It was unclear Monday afternoon whether Bobbitt planned to press ahead with the deal.
"There were two lengthy and informative public discussions on the matter and reinforcement expressed by the Board that these are the types of conversations that we need to be having," Nate Hinkel, the UA System's communications director, said in an email.
"Dr. Bobbitt has previously said it would be difficult to move forward without support from the Board for this project. That statement remains true, and he is certainly disappointed in the outcome of the meeting."
Balance of Power
Crass, appointed to the board in March by Gov. Sarah Huckabee Sanders, voted against the resolution Monday, raising concerns about UA System's right to leave the agreement early and its power on the TES board. He also questioned why a vote of trustees was called if it wasn't needed.
"I'm a little bit at a loss and confused as to our actual role if the president can do this without an affirmative vote of the board," Crass said.
Board Chairman Morril Harriman and Trustee Sheffield Nelson also voted against the resolution, raising questions about the agreement’s perceived imbalance of power.
In response, UA System general counsel Patrick Hollingsworth said the system would have a right to end the affiliation if Phoenix was in "material default" on the terms of the deal.
Trustees Ed Fryar and Nate Todd voted for the resolution and spoke in support, with Fryar comparing the possible significance of the deal to another opportunity that famously slipped away from the state.
"This is a FedEx moment," he said.
Eichler withheld her vote over conflict-of-interest concerns but had expressed support for the idea last week. Her husband, Brad Eichler, works for Stephens Inc. of Little Rock, which is providing the UA System with merger and acquisition advice on the deal. Brad Eichler was recently promoted to chief operating officer, effective May 1.
The proposed deal was first reported by the Arkansas Times in January and quickly drew objections from faculty of the system’s flagship university in Fayetteville and C.C. “Cliff” Gibson III, an attorney in Monticello who was the chairman of the UA System board at the time. His term ended March 1.
Gibson wrote to Bobbitt in February to say that "Phoenix carries a high negative connotation among Universities and just about anybody else in higher education." He has also has criticized Bobbitt for not informing the entire board and chancellors about the potential transaction earlier.
While word of the deal has been circulating in the press since the initial Times report, Bobbitt didn’t officially present it to board members until a special meeting on Wednesday.
During last week's meeting, Trustee Steve Cox said that he needed “more time to digest" the deal. Cox voted against the deal Monday.
Marshall McKissack, the managing director and head of M&A Advisory at Stephens, told trustees last week that the valuation for the University of Phoenix is $535 million. He said the actual purchase price is confidential.
McKissack said the purchase price represents 3.8 times adjusted earnings before interest, taxes and amortization.
“When you add in the $200 million of cash on the balance sheet, that valuation is less than three times net of the cash retained. That compares very favorably to other translations that have been done” for companies in that industry,” he said. “So almost a 50% discount.”
McKissack said the financial model would adequately service the debt, provide the $20 million licensing fee to the UA System and produce money for cash reserves for investment and growth.
“After the debt is repaid, or attractively refinanced in the future, it opens up significant financial flexibility with the cash flows available for TES and the University of Arkansas System,” McKissack said.
Bobbitt also said that the UA System wasn’t signing off on the debt for the University of Phoenix.
At the Wednesday meeting, Harriman raised concerns about Phoenix's reputation, which he said would be “very, very difficult to change.”
In December 2019, the University of Phoenix reached a record $191 million settlement with the Federal Trade Commission to end charges that it used deceptive advertising to attract prospective students. Bobbitt has said there’s a difference between the reputations of the old University of Phoenix and the one that was acquired by the Apollo Education Group Inc. of Phoenix in 2017.
Harriman also said it would be difficult for the public to understand that the UA System didn’t buy the University of Phoenix.
“It concerns me that we’re going to have a quote affiliation with a major player … and yet we as a board of the University of Arkansas System have no control," Harriman said Wednesday.
Last week, Julie Miceli, an attorney at the Chicago office of Husch Blackwell who is advising on the deal, told trustees that the step would be for TES to obtain its financing and then to finalize the terms of an asset purchase agreement with the owners of the University of Phoenix.
Miceli told the board members on Wednesday that “time is of the essence” in making a decision. TES and the University of Phoenix would have a May deadline of getting an application to the Higher Learning Commission.
“We have to finalize and negotiate the purchase agreement,” she said. “We have to finalize the financing commitment, those dominoes all have to get knocked down in order to submit an application for a change in control change in ownership before the Higher Learning Commission.”
In addition to an approval from the HLC, the accreditation organization for colleges, the deal would also go before the U.S. Department of Education.
“With the appropriate approvals, the transaction would look to close towards the end of the calendar year,” Miceli told trustees Wednesday.