There was a big merger in the private education space announced this morning. Strayer Education (STRA) and Capella Education (CPLA) announced that they have agreed to combine in an all-stock merger of equals transaction. Capella shareholders are receiving 0.875 Strayer shares for each Capella share, which represents a premium of approximately 22% to Friday's close.
The implied equity value of the combined company is approximately $1.9 billion. The merger is expected to be tax-free to shareholders of both companies. Strayer shareholders will own approximately 52% and Capella shareholders will own approximately 48% of the combined company. The deal is expected to close in 3Q18.
Strayer will be the remaining corporate entity under which both universities will operate, with its corporate headquarters being located in Herndon, Virginia, and the company will maintain a significant presence in Minneapolis, including the headquarters of Capella University and the combined entity's IT resources. The transaction has been unanimously approved by the Boards of Directors of both companies.
Strayer University and Capella University will continue to operate as independent and separately accredited institutions, together serving approximately 80,000 students across all 50 states. Both universities will maintain their separate Boards, be led by their current Presidents and maintain faculty and academic support service positions separately at each respective institution. However, the combination is expected to achieve corporate level efficiencies. Specifically, it's expected to achieve annual cost savings of approximately $50 mln and be fully phased in within 18 months of closing.
The companies say that they complement each other well: the deal unites Strayer's degrees in business, including the Jack Welch Management Institute, accounting, economics, and IT with Capella's competency-based flexible degree programs, healthcare offerings, and robust doctoral portfolio. The main benefit is that the merger will allow for back office efficiencies captured through the merger of their corporate functions.
Other benefits include increased scale, and greater capabilities. While the universities will remain independent, students and faculty at both institutions will benefit from Capella's competency-based learning infrastructure and assessment capabilities while Strayer's video and simulation classroom and content capabilities will helps Capella.
The broader, more diversified product offering of the combined company also will provide for a more balanced revenue mix. The combined company will have a strong, debt free balance sheet, and enhanced cash flow. The companies expect to pay an annual dividend of $2.00 per share following the close of the transaction. Finally, the merger is expected to be accretive to Strayer's EPS by approximately 20% to 25% by 2019.
In sum, the stock prices of both companies are trading higher this morning, especially CPLA which is up nearly 30%. So it's clear investors like the merger see how the deal makes sense. The deal allows the companies to save on corporate expenses. It also is a match in the sense that Strayer is mostly focused on bachelor's degrees while Strayer has a focus on online graduate degrees. On a final note, CPLA's stock sold off in late July on Q2 earnings/guidance. So this was a nice bit of good news for CPLA shareholders. Be sure to watch other education stocks as this deal could trigger speculation of other mergers in this space: APEI, BPI, CECO, GHC, LOPE.