Chinese buy out of UK Schools

| Career Insights

There has been increasing attention showed to the expansion of Bright Scholar, a Nasdaq-listed Chinese schools’ group, who has been acquiring UK schools over the past few years. Arguably, Nigel Farage’s tweet calling the acquisitions a ‘Communist takeover of our education system’ has thrown this into the limelight.

Chinese buy out of UK Schools

What has just happened?

There has been increasing attention showed to the expansion of Bright Scholar, a Nasdaq-listed Chinese schools’ group, who has been acquiring UK schools over the past few years. Arguably, Nigel Farage’s tweet calling the acquisitions a ‘Communist takeover of our education system’ has thrown this into the limelight. [1]

What does this mean?

Although some may see the purchase of historical public schools, such as Princess Diana’s Prep school Riddlesworth Hall, as a Communist takeover. On the surface, the acquisition is the needed cash injection and lifeline for many of these educational institutions who have financially suffered under the ‘Stay at Home’ order.

The 2,500 independent schools in the UK are facing a funding crisis.[2] Many independent schools have been forced to reduced fees in order to reflect the move to online learning. Some institutions have gone as far as furloughing classroom support staff whose role has become redundant during the era of Zoom learning.

Bright Scholar is a publicly listed company spun out of the Country Garden property development firm. Chinese Billionare Yang Huiyan is both the CEO of Country Garden and the majority shareholder in Bright Scholar. As a result, bright Scholar has had the resources of Country Garden behind its expansion. Notably, Country Garden raised ‘£181m from an initial public offering in New York in 2017 and a further $190m last year’. [3] Currently, Bright Scholar operates 69 schools in China, many of which were constructed by Country Garden. [4]

However, in 2016 China adopted an amendment to the Law of Promoting Privately Run Schools having mixed effects on the profitably of Bright Scholar. Although the ‘amendment’ supported the expansion of ‘for-profit’ schools, it banned for-profit schools offering the compulsory education curriculum. The introduction of the ‘amendment’ has motivated Bright Scholar to diversify their investment portfolio through international investments such as the buy-out of UK schools.

What is the legal impact?

The two areas of interest include the regulations surrounding the purchase of an UK Private school and the potential impacts on Bright Scholar as a publicly listed company.

80% of private schools have the status of a charitable trust which impacts their ability to be bought and sold like a private firm. The sale of a charitable school, such as Bosworth Independent College last month for £38m to Bright Scholar, would have likely occurred through an asset sale. [5] Having a charitable status results in the membership rights of the charitable school not conferring propriety rights, instead the assets must be solely used for charitable purposes. 

Furthermore, the difficulty would arise in valuing the market price of the school. Covid-19 has had a drastic impact on the current and future revenue streams of UK Independent schools. The difficult economic state of many independent schools is likely to be a factor in favour of the buying party, as they are able to drive the asset price down.

Another complicated area of a buyout includes the automatic transfer, under the Transfer of Undertakings (Protection of Employment) Regulations, of all staff to the new ownership board. The TUPE regulation ensures that there is no collective redundancy following the take-over. This is likely to reduce the speed of academic and structural change at the independent institutions.

On the other hand, there has been a trend increase in M&A activity within the education sector. Yet, the regulations in China with regard to ‘for-profit schools’ and Covid-19 has impacted the stock price and investment confidence in Bright Scholar. Its current debt to equity ratio is rated high at over 90% which has been caused by the increased spending on international schools. Furthermore, the current net profits of Bright Scholar have nearly halved from the financial year of 2019-2020 from 9.3% to 4.7%. [6]

However, Bright Scholar is still considered a good potential investment due to its synergistic relationship with Country Garden and the potential growth in Education M&A.[7] Moreover, the number of students in its international schools rose by 10.5% in 2021.[8]

Education M&A is an interesting area which is likely to see rapid expansion and change following the impacts of Covid-19. Although some may see the buyouts as a ‘communist takeover ‘following Brexit the UK needs to align itself with the other international economic power houses and the surge of Chinese investment in UK education may be a way forward.

 

By Megan Hornsby

The Legists Content Team

Assessing firms

#WhiteandCase #Dentons #DLAPiper #Ashfords #BurgesSalmon #Mills&Reeves #Fieldfisher #HoganLovells

 

References

[1] Nigel Farage, ‘ Communist Take over of Education’ (Twitter,20 February 2021)https://twitter.com/Nigel_Farage?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Eauthor accessed on 22 February 2021

[2] Carly Schiff, ‘UK Independent school finances set for gruelling Covid Test’ (Fieldfisher, 21 October 2020)< https://www.fieldfisher.com/en/insights/uk-independent-school-finances-set-for-gruelling-c> accessed on 28 February 2021

[3] Andrew Jack, ‘Chinese group buys UK schools Network’ (Financial Times, 9 July 2019) < ttps://www.ft.com/content/96a49f28-a26a-11e9-974c-ad1c6ab5efd1> accessed on 25 February 2021

[4] Ibid.

[4] Sherry Gong, ‘China to allow for-profit schools, expect in compulsory education’ (Hogan Lovells Publications, 13 December 2016) https://www.hoganlovells.com/en/publications/china-to-allow-for-profit-schools-except-in-compulsory-education accessed on 23 February 2021

[5] Andrew Jack, ‘Chinese group buys UK schools Network’ (Financial Times, 9 July 2019) < ttps://www.ft.com/content/96a49f28-a26a-11e9-974c-ad1c6ab5efd1> accessed on 25 February 2021

[6] Fitch Ratings, ‘Correction: Fitch Affirms Bright Scholar at ‘BB-‘;Outlook Stable’ (FitchRatings, 7 February 2021) ≤ https://www.fitchratings.com/research/corporate-finance/correction-fitch-affirms-bright-scholar-at-bb-outlook-stable-07-02-2021> accessed on 28 February 2021

[7] Ibid.

[8] Ibid.

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