Afya Limited AFYA $16.00-$18.00 13.7 million
shares Underwriters: BofA Merrill Lynch, Goldman Sachs, UBS Investment
Bank, Itau BBA, Morgan Stanley, BTG Pactual, XP Investments Co-Managers: Proposed
trade date of 7/19 They are the leading medical education group in
Brazil based on number of medical school seats, as published by the Brazilian
Ministry of Education
Afya Limited AFYA
Click here
to view the prospectus.
https://www.sec.gov/Archives/edgar/data/1771007/000104746919004047/a2239191zf-1a.htm
Company
Overview
They are the leading medical education group in
Brazil based on number of medical school seats, as published by the Brazilian Ministry of
Education, or MEC, as of December 31, 2018, delivering an end-to-end
physician-centric ecosystem that serves and empowers students to be lifelong
medical learners from the moment they join them as medical students through
their medical residency preparation, graduation program, and continuing medical
education activities, or CME.
Their innovative methodological approach combines
integrated content, interactive learning, and an adaptive experience for
lifelong medical learners. Through their educational content and
technology-enabled activities, they focus on effective, personalized learning
that mirrors one-on-one tutoring.
They have the largest medical education footprint in
Brazil. Their undergraduate and graduate campuses are spread across 12
Brazilian states, and their digital medical platform is available across
Brazil. As of March 31, 2019 and as of December 31, 2018,
their network of 14 undergraduate and graduate medical school campuses
consisted of 9 operating units (units that have been approved by MEC and that
have commenced operations) and 5 approved units (units that have been approved
by MEC but that have not yet commenced operations), compared to 4 operating units
as of March 31, 2018 and as of December 31, 2017. As of
March 31, 2019 and as of December 31, 2018, their network of 1,167
medical school seats consisted of 917 operating seats (seats that have been
approved by MEC and that have commenced operations) and 250 approved seats
(seats that have been approved by MEC but that have not yet commenced
operations), compared to 636 and 420 operating seats as of March 31, 2018
and as of December 31, 2017, respectively. Following their acquisitions
in the second quarter of 2019, their network of medical school seats increased
to 1,352 seats, consisting of 250 approved seats and 1,102 operating seats, and
to 16 operating campuses. They plan to expand their network by opening the
5 approved campuses they were recently awarded in connection with the
"Mais Médicos" program (the Brazilian federal government initiative
to reduce shortages of doctors in the most underserved and vulnerable regions
of Brazil) by December 31, 2020, taking their total to 23 operating
campuses in 12 Brazilian states.
In addition to health sciences courses,
which comprise medicine, dentistry, nursing, radiology, psychology, pharmacy,
physical education, physiotherapy, nutrition and biomedicine, they also offer
degree programs and courses in other subjects and disciplines across several of
their campuses, including undergraduate and post graduate courses in business
administration, accounting, law, physical education, civil engineering,
industrial engineering and pedagogy. These non-health courses are not part
of their core business, although the number of non-health sciences courses they
offer has increased as a consequence of their strategic acquisitions in 2018 of
multi-disciplinary schools with strong health sciences programs, which are their
principal focus. Although non-health courses are not part of their growth
strategy, they expect to continue to offer them to the extent they generate
local demand. Following their acquisition of Medcel in the first quarter of
2019, they also offer medical preparatory courses and other continuing medical
education offerings through their online platform.
As
of March 31, 2019, they had 26,608 enrolled students, compared to 9,323
enrolled students as of March 31, 2018, representing growth of 185.4% for
the period. As of December 31, 2018, they
had 19,720 enrolled students, compared to 10,164 enrolled students as of
December 31, 2017, representing growth of 94.0% for the year.
Their business model is characterized by high
revenue visibility and operating leverage. Over 98% of their historical revenue
for the three months ended March 31, 2019 and for the years ended
December 31, 2018 and 2017 was comprised of the monthly tuition fees they
charge students enrolled in their undergraduate and graduate courses. Following
their acquisition of Medcel in the first quarter of 2019, they expect their
revenue will be driven primarily by the monthly tuition fees they charge
students enrolled in their undergraduate and graduate courses (which
represented 80.7% and 88.6% of their total pro forma revenue for the three
months ended March 31, 2019 and the year ended December 31, 2018,
respectively), and the fees Medcel charges students enrolled in its residency
preparatory courses (which represented 19.3% and 11.4% of their total pro forma
revenue for the three months ended March 31, 2019 and the year ended
December 31, 2018, respectively). In addition, in 2018, approximately
85.6% of Medcel's residency preparatory courses revenue was derived from
printed books and e-books, and approximately 14.4% was derived from access to
Medcel's digital platform. Their ability to execute their business model and
strategy, primarily through their acquisitions (which represented approximately
61% and 64% of their total growth in terms of combined tuition fees
In
2018, they were also awarded 7 new undergraduate campuses in connection with
the "Mais Médicos" program, the largest number awarded to any
education group, though two of these awards are currently suspended by court
order, as they are the subject of proceedings filed by certain of their
competitors against MEC challenging the results of the public procurement for
those awards.
IPO
Detail
This is the initial public offering of Afya
Limited and no public market currently exists for its common stock. Afya
Limited is offering 13,744,210 shares of common stock as described in the
prospectus. The company expects the initial public offering price of its common
stock to be between $16.00 and $18.00 per share. The company has applied to
list its common stock on the NASDAQ Global Market under the symbol “AFYA.”
|
Class A common
stock offered by the company |
11,827,256 Class A common shares shares |
|
Class A common
stock offered by the selling shareholder |
1,916,954 Class A common shares
|
|
Class A common
stock to be outstanding immediately after this offering |
29,753,059 Class A common shares |
|
Class B common
stock to be outstanding immediately after this offering |
57,929,585 Class B common shares |
At their
request, the underwriters have reserved, at the initial public offering price,
up to 1.6% of the Class A common shares offered by them by this prospectus
for sale to their directors, officers and certain of their employees and other
persons associated with them.
Following
this offering, their existing shareholders, including Nicolau Carvalho Esteves
and Rosângela de Oliveira Tavares Esteves, or the Esteves Family, and Bozano
Educacional II Fundo de Investimento em Participações Multiestratégia, or
Crescera, will beneficially own 66.1% of their outstanding share capital,
assuming no exercise of the underwriters' overallotment option referred to
below. The shares held by the Esteves Family and Crescera are Class B
common shares, which carry rights that are identical to the Class A common
shares being sold in this offering, except that (i) holders of
Class B common shares are entitled to 10 votes per share, whereas holders
of their Class A common shares are entitled to one vote per share,
(ii) Class B common shares have certain conversion rights and
(iii) holders of Class B common shares are entitled to preemptive
rights in the event that additional Class A common shares are issued, in
order to maintain their proportional ownership interest. As a result, the
Esteves Family and Crescera will control approximately 95.1% of the voting
power of their outstanding share capital following this offering, assuming no
exercise of the underwriters' overallotment option, and will, so long as they
control the voting power of their outstanding share capital, effectively
control substantially all matters requiring shareholder approval.
Use of
Proceeds
They estimate that the net proceeds from their
issuance and sale of 11,827,256 shares of their Class A common shares in
this offering will be approximately US$185.8 million. They intend to
use the net proceeds from this offering to fund future acquisitions (including
at least 1,000 medical school seats) and investments in complementary
businesses, products or technologies. Any remaining net proceeds will be used
for general corporate purposes. They will have broad discretion in allocating
the net proceeds from this offering.
Competition
|
Company |
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Stock Symbol |
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Exchange. |
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Associação
Educacional Nove de Julho |
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Private |
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Laureate
Education Inc. |
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LAUR |
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NASDAQ |
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. Estácio Participacoes SA |
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ECPCY |
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OTC |
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Ktoyon
Educacio/S |
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KROTY |
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OTC |
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MedGrupo
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Private |
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Market
Opportunity
According to
Accenture do Brasil Ltda., or Accenture, the total addressable market
for the medical career segment in Brazil was R$16.4 billion as of
December 31, 2018, comprised of (i) a R$10.0 billion medical
school market, (ii) a R$1.0 billion residency preparatory courses
market, (iii) a R$3.7 billion medical specialization courses market,
a (iv) a R$1.6 billion continuing medical education market. They
estimate they currently capture approximately 2.0% of the total addressable
market based on their net revenue for the year ended December 31, 2018.
This market encompasses over 700,000 lifelong medical learners in Brazil,
comprised of 108,000 medical students, 71,000 students seeking residency
preparatory courses, and 76,600 and 454,848 physicians seeking to enroll in
specialization courses and CME, respectively.
Medical education in
Brazil benefits from a combination of demographic and social factors, such as
the expected increase in the number of people over 65 due to the increase in
average life expectancy, as well as the shortage of medical professionals in
Brazil, which has resulted in an imbalance between supply and demand. It also benefits from macroeconomic and financial
factors, such as the increase in average household income, which has resulted
in an increase in demand for medical services and an increase in private and
public healthcare spending. Accordingly, they expect the medical education
market in Brazil to continue to grow.
Additionally,
given their end-to-end and physician-centric ecosystem, their strong business
model, and their reputation for quality, they believe that they are
well-positioned to take advantage of the favorable growth dynamics of the
medical education market in Brazil. According to Accenture, the total
addressable market for medical education is expected to grow at a compound
annual growth rate, or CAGR, of 14.1% over the next 5 years, reaching
R$31.6 billion by 2023. Including other healthcare education services, the
addressable market is expected to grow at a CAGR of 13.6% in the next
5 years, reaching R$64.9 billion by 2023.
Increased
life expectancy and demand for medical services: The Brazilian population is aging at
the fastest rate in its recent history. Average life expectancy is currently
76.2 years, and the number of people over 65 should double from 7% of the
total population in 2012 to 14% of the total population in 2033. This has led
to, and is expected to continue to drive, increased demand for health care
professionals. In addition, private healthcare spending and public
healthcare spending in Brazil grew at a CAGR of 14.0% and 11.8%, respectively,
from 2010 to 2015, primarily due to an increase in demand for medical services
as a result of an aging population and an increase in average household income.
These trends have continued since 2015 to date.
Shortage of
medical professionals in Brazil: There is a shortage of medical professionals in Brazil,
primarily due to the uneven socio-economic environment. On average,
Brazilian cities with less than 50,000 inhabitants, which corresponds to
approximately 90% of all cities in Brazil, have less than 1 physician per 1,000
residents. Brazil is expected to have an average of 3.07 physicians per
1,000 inhabitants by 2028, below the 3.4 average for 2018 of Organization for
Economic Cooperation and Development, or OECD, countries.
Attractive
financial incentives: The medical profession is lucrative. Medical professionals
are highly employable, with salaries that are on average more than three times
higher than the average salary for other professions such as engineering,
nursing and law, and 1.9 to 3.8 times higher than the net present value of
engineering, nursing or law programs in Brazil.
Supply and
demand imbalance for medical education: The number of available medical course seats in Brazil is
controlled by the MEC, which has limited medical school intakes to current
levels until 2023, resulting in a significant imbalance between supply and
demand. In the last 3 years, medical schools have on average received
five applications per available medical course seat, and four applications per
available residency program vacancy, and the number of applications are
expected to increase. They believe that graduate courses will gradually
become a more popular, high-demand destination for physicians that are not
admitted into residency programs.
|
|
Historical Afya Brazil |
|
Pro Forma |
|
|
||||||||||||||
|
|
|
For the Three Months Ended
March 31, |
|
||||||||||||||||
|
|
|
2019 |
|
2019 |
|
2018 |
|
2019 |
|
2019 |
|
2018 |
|
||||||
|
|
|
US$ |
|
R$ millions |
|
US$ |
|
R$ millions |
|
||||||||||
|
Income Statement Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
|
37.1 |
|
|
144.6 |
|
|
61.3 |
|
|
46.0 |
|
|
179.3 |
|
|
149.0 |
|
|
Cost of services |
|
|
(14.0 |
) |
|
(54.4 |
) |
|
(28.2 |
) |
|
(15.0 |
) |
|
(58.4 |
) |
|
(55.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
23.1 |
|
|
90.2 |
|
|
33.1 |
|
|
31.0 |
|
|
120.9 |
|
|
94.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
(8.0 |
) |
|
(31.2 |
) |
|
(14.3 |
) |
|
(11.7 |
) |
|
(45.5 |
) |
|
(38.4 |
) |
|
Other income (expenses), net |
|
|
(0.1 |
) |
|
(0.2 |
) |
|
0.8 |
|
|
(0.1 |
) |
|
(0.4 |
) |
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
15.1 |
|
|
58.8 |
|
|
19.6 |
|
|
19.2 |
|
|
75.0 |
|
|
56.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income |
|
|
1.3 |
|
|
5.2 |
|
|
1.7 |
|
|
1.5 |
|
|
5.7 |
|
|
3.4 |
|
|
Finance expenses |
|
|
(3.1 |
) |
|
(12.2 |
) |
|
(1.1 |
) |
|
(3.3 |
) |
|
(12.8 |
) |
|
(9.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance result |
|
|
(1.8 |
) |
|
(7.1 |
) |
|
0.6 |
|
|
(1.8 |
) |
|
(7.1 |
) |
|
(5.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
13.3 |
|
|
51.7 |
|
|
20.3 |
|
|
17.4 |
|
|
67.8 |
|
|
50.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes expense |
|
|
(0.6 |
) |
|
(2.2 |
) |
|
(1.4 |
) |
|
(0.9 |
) |
|
(3.6 |
) |
|
(3.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
12.7 |
|
|
49.5 |
|
|
18.9 |
|
|
16.5 |
|
|
64.2 |
|
|
47.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity holders of the parent |
|
|
10.7 |
|
|
41.5 |
|
|
17.5 |
|
|
14.4 |
|
|
56.3 |
|
|
43.8 |
|
|
Non-controlling interests |
|
|
2.0 |
|
|
7.9 |
|
|
1.3 |
|
|
2.0 |
|
|
7.9 |
|
|
3.3 |
|
|
Earnings per share (R$, unless otherwise
indicated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share—basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares |
|
|
5.17 |
|
|
20.13 |
|
|
15.23 |
|
|
5.91 |
|
|
23.04 |
|
|
28.67 |
|
|
Earnings per share—diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares |
|
|
5.07 |
|
|
19.74 |
|
|
15.23 |
|
|
5.81 |
|
|
22.66 |
|
|
28.67 |
|
|
|
Historical Afya Brazil |
|
||||||||||||||
|
|
|
As of March 31, |
|
As of December 31, |
|
|||||||||||
|
|
|
2019 |
|
2019 |
|
2018 |
|
2018 |
|
2017 |
|
|||||
|
|
|
US$ |
|
R$ |
|
US$ |
|
R$ millions |
|
|||||||
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
63.0 |
|
|
245.3 |
|
|
16.0 |
|
|
62.3 |
|
|
25.5 |
|
|
Trade receivables |
|
|
26.3 |
|
|
102.6 |
|
|
15.0 |
|
|
58.4 |
|
|
28.5 |
|
|
Inventories |
|
|
1.0 |
|
|
3.8 |
|
|
0.3 |
|
|
1.1 |
|
|
0.4 |
|
|
Related parties |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2.6 |
|
|
Recoverable taxes |
|
|
0.8 |
|
|
3.2 |
|
|
0.6 |
|
|
2.3 |
|
|
1.6 |
|
|
Derivatives |
|
|
— |
|
|
— |
|
|
0.2 |
|
|
0.6 |
|
|
— |
|
|
Other assets |
|
|
5.5 |
|
|
21.4 |
|
|
2.3 |
|
|
8.9 |
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
96.5 |
|
|
376.2 |
|
|
34.3 |
|
|
133.5 |
|
|
60.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
4.8 |
|
|
18.8 |
|
|
4.8 |
|
|
18.8 |
|
|
— |
|
|
Trade receivables |
|
|
2.6 |
|
|
10.3 |
|
|
1.3 |
|
|
5.2 |
|
|
2.3 |
|
|
Related parties |
|
|
0.4 |
|
|
1.7 |
|
|
0.4 |
|
|
1.6 |
|
|
1.0 |
|
|
Derivatives |
|
|
— |
|
|
— |
|
|
0.2 |
|
|
0.7 |
|
|
— |
|
|
Other assets |
|
|
3.5 |
|
|
13.5 |
|
|
2.7 |
|
|
10.4 |
|
|
2.7 |
|
|
Investment in associate |
|
|
6.3 |
|
|
24.5 |
|
|
— |
|
|
— |
|
|
— |
|
|
Property and equipment |
|
|
19.0 |
|
|
74.0 |
|
|
16.9 |
|
|
65.8 |
|
|
32.5 |
|
|
Right-of-use assets |
|
|
55.1 |
|
|
214.7 |
|
|
— |
|
|
— |
|
|
— |
|
|
Intangible assets |
|
|
225.6 |
|
|
879.1 |
|
|
175.1 |
|
|
682.5 |
|
|
4.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets |
|
|
317.3 |
|
|
1,236.5 |
|
|
201.4 |
|
|
784.9 |
|
|
43.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
413.9 |
|
|
1,612.8 |
|
|
235.7 |
|
|
918.4 |
|
|
103.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade payables |
|
|
4.0 |
|
|
15.4 |
|
|
2.1 |
|
|
8.1 |
|
|
6.7 |
|
|
Loans and financing |
|
|
7.7 |
|
|
30.1 |
|
|
6.9 |
|
|
26.8 |
|
|
1.2 |
|
|
Lease liabilities |
|
|
7.4 |
|
|
28.8 |
|
|
— |
|
|
— |
|
|
— |
|
|
Accounts payable to selling shareholders |
|
|
20.2 |
|
|
78.8 |
|
|
22.8 |
|
|
88.9 |
|
|
— |
|
|
Advances from customers |
|
|
4.1 |
|
|
15.9 |
|
|
3.5 |
|
|
13.7 |
|
|
8.3 |
|
|
Labor and social obligations |
|
|
9.6 |
|
|
37.4 |
|
|
8.2 |
|
|
32.0 |
|
|
18.3 |
|
|
Taxes payable |
|
|
3.4 |
|
|
13.1 |
|
|
1.7 |
|
|
6.5 |
|
|
1.6 |
|
|
Income taxes payable |
|
|
0.1 |
|
|
0.4 |
|
|
0.1 |
|
|
0.3 |
|
|
1.0 |
|
|
Dividends payable |
|
|
— |
|
|
— |
|
|
1.1 |
|
|
4.1 |
|
|
14.9 |
|
|
Derivatives |
|
|
— |
|
|
0.1 |
|
|
— |
|
|
— |
|
|
— |
|
|
Other liabilities |
|
|
1.0 |
|
|
3.8 |
|
|
0.5 |
|
|
2.0 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
57.4 |
|
|
223.7 |
|
|
46.8 |
|
|
182.3 |
|
|
51.9 |
|
Target
Markets
Maturation of current number of authorized
medical school seats They benefit from contracted growth visibility in their
medical schools that are in the initial six years of operations, which they
derive from two main sources: (1) the six-year maturation cycle of their
medical school seats, which begins when a medical school becomes operational,
with a first year medical school class which progresses through the required
six years as the next classes begin behind it, and which ends when the medical
school has six school years of medical students and has therefore reached
capacity at maturation (i.e., the maximum number of approved seats), and
(2) new enrollments from their five recently awarded campuses in
connection with the "Mais Médicos" program. Since the maximum
number of medical seats per medical school is set by applicable regulations,
the only way to grow their medical school seats, and thus their number of
enrollments, is through acquisitions or starting new medical schools. Assuming
full compliance with applicable regulations and that their 5 new "Mais Médicos"
campuses mature as expected with 50 medical seats for each campus, they
estimate reaching a total medical student base of 9,654 students by 2025
Expand their medical residency preparation
enrollments base Competition
for medical residencies should increase as the number of graduating physicians
grows and the number of available residency seats remains static. According to
Accenture, the number of applicants for medical residency programs is expected
to grow at a rate of 13.4% per year through 2022. They plan to continue to
grow their medical residency exam preparation student enrollments, leveraging
the academic outcome, scalability and learning experience of their digital
platform.
Expand their graduate programs enrollments
base Due to the shortage of
medical residency seats and the growing demand for medical graduate courses,
they believe they will be able to expand their current offering in this
segment.
They intend to
continue developing their business-to-business strategy by increasing the
number of partners and student enrollments through increased marketing and
sales effort.
Cross sell across their existing medical
students base Because
their solutions target the lifelong education journey of medical students, they
have identified an opportunity to increase student enrollments at a low
marginal cost driven by cross selling opportunities such as increasing the
number of former undergraduate students subscribing to their medical residency
exam solutions and the number of former undergraduate and/or medical residency
students applying to their graduate and CME courses.
Expand their B2B capabilities B2B contracts are effective customer entry
points to their products and services. Students are familiar with their
platforms, increasing their brand equity and helping them attract more
physicians to enroll in preparatory courses, graduate programs and CME
products.
Expand their distribution channels They
plan to continuously expand their distribution network by increasing their
presence in direct and third-party channels, launching graduate courses or CME
for third-party continuing medical education hubs (including, but not limited
to, hospitals, clinics and other medical schools) to grow their graduate
medical footprint, through partnerships with such third-party continuing
medical education hubs.
Leverage infrastructure and extract synergies
from acquisitions They
believe they have been able to successfully integrate their acquisitions into their
ecosystem. They plan to implement several measures to improve the
profitability of recent acquisitions, including but not limited to:
·
Streamlining fee discounts
and scholarship policies;
·
Integrating operations with their
shared-services center;
·
Streamlining faculty
training in line with their career plan; and
·
Integrating teaching models
into their academic model.
Continue to selectively pursue M&A
opportunities They
plan to selectively pursue acquisitions that will complement their current
medical education services offering and/or enhance their product portfolio,
such as digital content platforms, continuing medical education institutions
and other medical certification companies, among others. They are currently
evaluating possible acquisition opportunities and submit non-binding proposals
from time to time. They believe that they have developed a strong capability
and track record of acquisitions. In the first half of 2019, they acquired or
invested in four companies, which increased their medical school seats by more
than 20% over the period. In 2018, they acquired or invested in five companies,
which increased their medical school seats by more than 118.3% over the year. Their
acquisition of Medcel enabled them to access the medical residency preparation
market, and the acquisition of IPEMED enabled them to enter the graduate
courses market. Their acquisition strategy is mainly focused on expanding
their medical school footprint by adding new institutions to their existing
portfolio.
Enter into new markets They believe their end-to-end
physician-centric ecosystem is equipped to serve medical students in
complementary segments where their innovative methodological, data-driven
approach can continue to disrupt traditional vendors and legacy business
models. They believe opportunities exist in new sectors and regions of
Brazil. In the future, they intend to focus on expanding further into
continuing medical education. They may also seek to grow their business by
selectively expanding into international markets with similar fundamentals.
Develop new products They plan to continuously evolve their
platform and offer solutions that keep up with the growing demands of their
students. They have a planned pipeline of new products, including new medical
web-series seasons, corporate medical training, new extension health programs,
a tutoring suite, a peer-to-peer suite and a virtual reality product.
Company's
Unique Strengths
Continuous focus on disrupting traditional
medical education
High quality standards Their operating infrastructure and innovative
methodological approach has increased student satisfaction across their medical
schools. Through their digital platforms, they monitor their students'
learning experience using several criteria and variables. According to
Educainsights, their NPS, a widely known survey methodology that measures the
willingness of customers to recommend a company's products and services, was 25
for medical students that graduated more than 5 years ago, 43 for medical
students that graduated more than 2 years ago and less than 5 years
ago, and 52 for medical students that graduated less than 2 years ago.
This gradual improvement in their NPS score shows their continuing commitment
to high-quality education and the medical career of their students.
Additionally, all of their undergraduate institutions are highly evaluated
by MEC, with an average Institutional Score (Conceito Institucional)
rating above 4, out of a maximum of 5.
In addition, their
online medical education platform that offers distance learning residency
preparatory courses, they are able to monitor their students' learning
experience using several criteria and variables, including the educational
materials they access and use, frequently asked questions, their study hours
and schedule, and their attendance record. Furthermore, as a result of the
quality of the content and methodology and the differentiated services offered
by Medcel, third-party medical schools proactively contact it seeking to adopt
Medcel's medical education content to improve their medical students' learning
experience and academic scores. As of March 31, 2019, approximately
five third-party schools had adopted Medcel's medical education content.
The nature of their business model
Attractive financial model: They have a strong
combination of significantly low customer acquisition costs, calculated as
the sum of sales and marketing and personnel expenses divided by student
additions, which were approximately R$1,300 per student as of December 31,
2018, high occupancy rates of approximately 100% of medical seats in their
medical schools as of March 31, 2019 and December 31, 2018, and
strong operating cash flow generation of 78.5% and 78.7% as of March 31,
2019 and December 31, 2018, respectively. Student additions are the sum of
543 student enrollments from 2017 to 2018 and 420 graduating student
replacements. As of December 31, 2018, their Life Time Value (LTV),
calculated as the sum of R$54,396 gross income per student divided by 16.7% (to
account for one-sixth of the student base graduating every year), was
R$326,376.
Contracted growth: They have contracted
growth visibility into medical schools that are in the initial six years of
operations as a result of the six-year maturation cycle of their medical school
seats. This cycle begins when a medical school becomes operational, with a first
year medical school class that progresses through the required six years as the
next classes begin behind it, and ends when the medical school has six school
years of medical students and has therefore reached capacity at maturation
(i.e., the maximum number of approved seats). Since the maximum number of
medical seats per medical school is set by regulation, the only way to grow their
medical school seats, and thus their numbers of enrollments, is through
acquisitions or starting new medical schools. As of March 31, 2019, they
had 1,167 approved medical school seats. Following their acquisitions in the
second quarter of 2019, their network of approved medical school seats
increased to 1,352 out of an expected total capacity of 9,654 medical school
enrollments by 2025, which gives them visibility as to the growth potential of their
revenues over the period.
End-to-End ecosystem: Successfully integrating
the businesses they invest in or acquire, allows them to offer an end-to-end
physician-centric ecosystem. The point of entry of one business unit is the
point of exit from another, which increases cross-selling and upselling
opportunities.
Difficult to replicate: They believe the
combination of regulatory barriers, demand and supply imbalance and their
end-to-end physician-centric ecosystem are difficult to replicate and that it
would take a significant amount of time for competitors to reach the scale of
their operation.
Self-reinforcing network effects of their education cycle: As they aim to be the
trusted content and knowledge partner for lifelong medical learners in Brazil, they
have created and have been nurturing an education cycle that entails
differentiation, talented stakeholders and recognition. Their continuous focus
on implementing all stages of their cycle has allowed them to continuously
expand their footprint.
Extensive M&A track record They have extensive capabilities in, and a
strong track record of, identifying, negotiating and successfully integrating
acquisitions. They have developed an integration model, operated by a
dedicated team responsible for analyzing, mapping and integrating the systems
of their acquired businesses, that they believe enables them to fully integrate
the businesses they acquire in an efficient manner and within 12 months of
their acquisition. In the first quarter of 2019 and in 2018, they successfully
acquired or invested in a total of seven companies, increasing their number of
medical schools seats, expanding into new medical education segments and
integrating new technologies that allow them to innovate and enhance their
value proposition to lifelong medical learners. As of the date of this
prospectus, they have fully integrated the operations of three of their
acquisitions with their existing business. They are in the process of
integrating the operations of their four other acquisitions, the integration of
which they expect to complete by May 2020.
Their pipeline
includes approximately 10,000 medical seats (each 1,000 medical school seats
represent a regulatory capacity of 7,200 students) that they view as attractive
potential targets, of which approximately 269 medical seats are the subject of
negotiations with signed, non-binding memorandums of understanding. For potential acquisitions, they target a minimum
internal rate of return, or IRR, of 30% (in R$ and in nominal terms). IRR is a
cash flow analysis metric they use to estimate the profitability of potential
acquisitions, and it measures the expected compound annual rate of return that
will be earned on an acquisition.
Purpose driven culture Medical education requires a core human value:
compassion. As they endeavor to revolutionize medical education in Brazil, they
believe that by training and educating better physicians they are helping people
and their communities across Brazil. This mission has united families and
entrepreneurs, executives and sponsors with over 20 years of knowhow and
expertise in the education sector. Their internal satisfaction survey
conducted in 2018 showed employee satisfaction levels of 86.3 out of a possible
100, based on several criteria, such as trust in, and a commitment to, their
values, leadership satisfaction, work satisfaction, learning and development
and active participation in their activities, reinforcing their strong
commitment to their mission and purpose.
Company's
Unique Risks
They may not be able to identify and acquire
new medical higher education institutions or meet their strategic and financial
goals in connection with any business acquisition they seek, and difficulties in effectively integrating and
managing a growing number of acquisitions may adversely affect their strategic
objectives.
Their revenues are highly concentrated in the
tuition fees they charge for their medical courses and other health sciences
programs, and any
economic, market or regulatory factors adversely affecting such medical courses
and health sciences programs could lead to decreased demand in the medical and
health courses they offer, which could materially adversely affect them.
If they lose the benefits of federal tax
exemptions provided under the PROUNI program, their business, financial
condition and results of operations may be materially adversely affected. Some of their students participate in the University
for All Program (Programa Universidade para Todos, or PROUNI program).
Through the PROUNI program, the Brazilian federal government grants a number of
full and partial scholarships to low-income post-secondary education students.
As a result of their participation in the PROUNI program, they benefit from
certain federal tax exemptions relating to bachelor's and associate's degree
programs. They may be disqualified from the PROUNI program and lose their
tax exemptions if they do not comply with certain requirements, such as
providing total or partial scholarships for a percentage of students who paid
their tuition in the previous year, granting partial scholarships, submitting
to MEC semi-annual records of attendance, achievement and drop-out of students
receiving scholarships, among others.
The unaudited pro forma financial information
included in this prospectus is presented for illustrative purposes only and may
not be indicative of their combined financial condition or results of
operations after giving effect to the Pro Forma Transactions.
The interests of their management team may be
focused on the short-term market price of their Class A common shares,
which may not coincide with your interests. Their directors and officers, among others, own
shares in the Company and are beneficiaries under their stock option plans. They
implemented their stock option plan in 2018. Due to the issuance of stock
options to members of their management team, a significant portion of their
compensation is closely tied to their results of operations and, more
specifically to the trading price of their Class A common shares, which
may lead such individuals to direct their business and conduct their activities
with an emphasis on short-term profit generation. As a result of these factors,
the interests of their management team may not coincide with the interests of their
other shareholders that have longer-term investment objectives.
Any increase in the attrition rates of
students in their education programs may adversely affect their results of
operations. They
believe that their attrition rates are primarily related to the personal
motivation and financial situation of their current and potential students, as
well as to socioeconomic conditions in Brazil. Their attrition rate was 18.2%
for the year ended December 31, 2018. Significant changes in future
attrition rates and/or failure to re-enroll may affect their enrollment
numbers, which may have a material adverse effect on their revenues and their
results of operations.
They could be adversely affected if they are
unable to renegotiate collective bargaining agreements with the labor unions
representing their professors and administrative employees or by strikes and
other union activity. Their
payroll costs and expenses account for the majority of the costs of the
services and general and administrative expenses, or 66.7%, 65.8% and 65.1% of
such costs and expenses for the three months ended March 31, 2019 and for
the years ended December 31, 2018 and 2017, respectively. Their faculty
and administrative employees are represented by labor unions in the higher
education sector and are covered by collective bargaining agreements or similar
arrangements determining the number of working hours, minimum compensation,
vacations and fringe benefits, among other terms. These agreements are
subject to annual renegotiation and may be so modified. They could also be
adversely affected if they fail to achieve and maintain cooperative
relationships with their professors' or administrative employees' unions or
face strikes, stoppages or other labor disruptions by their professors or
employees.
They are subject to supervision by MEC and,
consequently, may suffer sanctions as a result of noncompliance with any
regulatory requirements.
Some of the properties that they occupy are
owned by companies controlled by one of their controlling shareholders. Therefore, they are exposed to conflicts of
interest, since the administration of such properties may conflict with their
interests, those of such controlling shareholder and those of their other
shareholders.
Failure to prevent or detect a malicious
cyber-attack on their systems and databases could result in a misappropriation
of confidential information or access to highly sensitive information.
Their success depends on their ability to
monitor and adapt to technological changes in the education sector and maintain
a technological infrastructure that works adequately and without interruption
The Brazilian federal government has
exercised, and continues to exercise, significant influence over the Brazilian
economy. This
involvement as well as Brazil's political and economic conditions could harm
them and the price of their Class A common shares.
The ongoing economic uncertainty and
political instability in Brazil may harm them and the price of their
Class A common shares. The recent
economic instability in Brazil has contributed to a decline in market
confidence in the Brazilian economy as well as to a deteriorating political
environment. In addition, various ongoing investigations into allegations of
money laundering and corruption being conducted by the Office of the Brazilian
Federal Prosecutor, including the largest such investigation, known as
"Operação Lava Jato," have negatively impacted the Brazilian economy
and political environment. The potential outcome of these investigations is
uncertain, but they have already had an adverse impact on the image and
reputation of the implicated companies, and on the general market perception of
the Brazilian economy. They cannot predict whether the ongoing
investigations will result in further political and economic instability, or if
new allegations against government officials and/or executives of private
companies will arise in the future.
Inflation and certain measures by the
Brazilian government to curb inflation have historically harmed the Brazilian
economy and Brazilian capital markets, and high levels of inflation in the
future would harm their business and the price of their Class A common
shares. In the past, Brazil has experienced extremely high rates of
inflation. Inflation and some of the measures taken by the Brazilian government
in an attempt to curb inflation have had significant negative effects on the
Brazilian economy generally. Inflation, policies adopted to curb
inflationary pressures and uncertainties regarding possible future governmental
intervention have contributed to economic uncertainty and heightened volatility
in the Brazilian capital markets.
The Esteves Family and Crescera, their
largest group of shareholders, will own 100% of their outstanding Class B
common shares, which will represent approximately 95.1% of the voting power of
their issued share capital following this offering, and will control all
matters requiring shareholder approval. This concentration of ownership and
voting power limits your ability to influence corporate matters. Immediately following this offering, the Esteves
Family and Crescera will control their company and will not hold any of their
Class A common shares, but will beneficially own 66.1% of their issued
share capital through their beneficial ownership of all of their
outstanding Class B common shares, and consequently, 95.1% of the combined
voting power of their issued share capital. As a result, the Esteves Family
and Crescera will control the outcome of all decisions at their shareholders'
meetings, and will be able to elect a majority of the members of their board of
directors. They will also be able to direct their actions in areas such as
business strategy, financing, distributions, acquisitions and dispositions of
assets or businesses.
Their dual class capital structure means
their shares will not be included in certain indices. They cannot predict the
impact this may have on their share price. In
2017, FTSE Russell, S&P Dow Jones and MSCI announced changes to their
eligibility criteria for inclusion of shares of public companies on certain
indices to exclude companies with multiple classes of shares of common stock
from being added to such indices. FTSE Russell
announced plans to require new constituents of its indices to have at least
five percent of their voting rights in the hands of public stockholders,
whereas S&P Dow Jones announced that companies with multiple share classes,
such as theirs, will not be eligible for inclusion in the S&P 500,
S&P MidCap 400 and S&P SmallCap 600, which together make up the
S&P Composite 1500. MSCI also opened public consultations on their
treatment of no-vote and multi-class structures and temporarily barred new
multi-class listings from its ACWI Investable Market Index and U.S. Investable
Market 2500 Index; however, in October 2018, MSCI announced its decision to
include equity securities "with unequal voting structures" in its
indices and to launch a new index that specifically includes voting rights in
its eligibility criteria. They cannot assure you that other stock indices
will not take a similar approach to FTSE Russell, S&P Dow Jones and MSCI in
the future.
Bottom Line
Their net revenue totaled R$144.6 million and R$61.3 million for the
three months ended March 31, 2019 and 2018, respectively, representing an
increase of 135.8%. Their net revenue totaled R$333.9 million and
R$216.0 million in 2018 and 2017, respectively, representing an increase
of 54.6%. Their pro forma net revenue totaled R$179.3 million and
R$149.0 million for the three months ended March 31, 2019 and 2018,
respectively. Their pro forma net revenue totaled R$547.6 million in
2018. They generated net income of
R$49.5 million and R$18.9 million for the three months ended
March 31, 2019 and 2018, respectively, representing an increase of 162.4%.
They generated net income of R$94.7 million and R$48.5 million in
2018 and 2017, respectively, representing an increase of 95.4%;
They are the leading medical education
group in Brazil based on number of medical school seats. Their undergraduate
and graduate campuses are spread across 12 Brazilian states, and their digital
medical platform is available across Brazil. As of March 31, 2019 and as
of December 31, 2018, their network of 14 undergraduate and graduate
medical school campuses consisted of 9 operating units (units that have been
approved by MEC and that have commenced operations) and 5 approved units (units
that have been approved by MEC but that have not yet commenced operations),
compared to 4 operating units as of March 31, 2018 and as of
December 31, 2017. Following their acquisitions in the second quarter of
2019, their network of medical school seats increased to 1,352 seats,
consisting of 250 approved seats and 1,102 operating seats, and to 16 operating
campuses. In addition to health sciences courses, which comprise medicine,
dentistry, nursing, radiology, psychology, pharmacy, physical education, physiotherapy,
nutrition and biomedicine, they also offer degree programs and courses in other
subjects and disciplines across several of their campuses, including
undergraduate and post graduate courses in business administration, accounting,
law, physical education, civil engineering, industrial engineering and
pedagogy. Following their acquisition of Medcel in the first quarter of 2019,
they also offer medical preparatory courses and other continuing medical
education offerings through their online platform. As of March 31, 2019,
they had 26,608 enrolled students, compared to 9,323 enrolled students as of
March 31, 2018, representing growth of 185.4% for the period. In 2018,
they were also awarded 7 new undergraduate campuses in connection with the "Mais
Médicos" program, the largest number awarded to any education group,
though two of these awards are currently suspended by court order, as they are
the subject of proceedings filed by certain of their competitors against MEC
challenging the results of the public procurement for those awards.
The total addressable market for the
medical career segment in Brazil was R$16.4 billion as of
December 31, 2018, comprised of (i) a R$10.0 billion medical
school market, (ii) a R$1.0 billion residency preparatory courses market,
(iii) a R$3.7 billion medical specialization courses market, a
(iv) a R$1.6 billion continuing medical education market. They
estimate they currently capture approximately 2.0% of the total addressable
market based on their net revenue for the year ended December 31, 2018.
Medical education in Brazil benefits from a combination of demographic and
social factors, such as the expected increase in the number of people over 65
due to the increase in average life expectancy, as well as the shortage of
medical professionals in Brazil, which has resulted in an imbalance between
supply and demand. They expect the medical education market in Brazil to
continue to grow. The total addressable market for medical education is
expected to grow at a compound annual growth rate, or CAGR, of 14.1% over the
next 5 years, reaching R$31.6 billion by 2023. Including other
healthcare education services, the addressable market is expected to grow at a
CAGR of 13.6% in the next 5 years, reaching R$64.9 billion by 2023.
The Brazilian population is aging at the fastest rate in its recent history.
Average life expectancy is currently 76.2 years, and the number of people
over 65 should double from 7% of the total population in 2012 to 14% of the
total population in 2033. This has led to, and is expected to continue to
drive, increased demand for health care professionals. There is a shortage of
medical professionals in Brazil, primarily due to the uneven socio-economic
environment. Brazil is expected to have an average of 3.07 physicians per 1,000
inhabitants by 2028, below the 3.4 average for 2018 of Organization for
Economic Cooperation and Development, or OECD, countries. Medical
professionals are highly employable, with salaries that are on average more
than three times higher than the average salary for other professions such as
engineering, nursing and law, and 1.9 to 3.8 times higher than the net present
value of engineering, nursing or law programs in Brazil. The number of
available medical course seats in Brazil is controlled by the MEC, which has
limited medical school intakes to current levels until 2023, resulting in a
significant imbalance between supply and demand. They believe that graduate
courses will gradually become a more popular, high-demand destination for physicians
that are not admitted into residency programs.
Since the maximum number of medical
seats per medical school is set by applicable regulations, the only way to grow
their medical school seats, and thus their number of enrollments, is through acquisitions
or starting new medical schools. Assuming full compliance with applicable
regulations and that their 5 new "Mais Médicos" campuses mature as
expected with 50 medical seats for each campus, they estimate reaching a total
medical student base of 9,654 students by 2025. They plan to continue to grow
their medical residency exam preparation student enrollments, leveraging the
academic outcome, scalability and learning experience of their digital
platform. Due to the shortage of medical residency seats and the growing demand
for medical graduate courses, they believe they will be able to expand their
current offering in this segment. They intend to continue developing their
business-to-business strategy by increasing the number of partners and student
enrollments through increased marketing and sales effort. Because their
solutions target the lifelong education journey of medical students, they have
identified an opportunity to increase student enrollments at a low marginal
cost driven by cross selling opportunities such as increasing the number of
former undergraduate students subscribing to their medical residency exam
solutions and the number of former undergraduate and/or medical residency
students applying to their graduate and CME courses. B2B contracts are
effective customer entry points to their products and services. Students are
familiar with their platforms, increasing their brand equity and helping them
attract more physicians to enroll in preparatory courses, graduate programs and
CME products. They plan to continuously expand their distribution network by
increasing their presence in direct and third-party channels, launching
graduate courses or CME for third-party continuing medical education hubs
(including, but not limited to, hospitals, clinics and other medical schools)
to grow their graduate medical footprint, through partnerships with such
third-party continuing medical education hubs. They plan to implement several
measures to improve the profitability of recent acquisitions. They plan to
selectively pursue acquisitions that will complement their current medical
education services offering and/or enhance their product portfolio, such as
digital content platforms, continuing medical education institutions and other
medical certification companies, among others. Their acquisition strategy is
mainly focused on expanding their medical school footprint by adding new
institutions to their existing portfolio. They believe opportunities exist in
new sectors and regions of Brazil. In the future, they intend to focus on
expanding further into continuing medical education. They may also seek to grow
their business by selectively expanding into international markets with similar
fundamentals. They plan to continuously evolve their platform and offer
solutions that keep up with the growing demands of their students. They have a
planned pipeline of new products, including new medical web-series seasons,
corporate medical training, new extension health programs, a tutoring suite, a
peer-to-peer suite and a virtual reality product.
As the largest medical education group
in Brazil, they are able to identify trends and adapt their services
accordingly. They have developed a methodological approach to learning that
incorporates individualization and technology in both digital and physical
format. They currently produce content that is centralized, continuously
updated and available to all their institutions and students. They have the
largest operating infrastructure in medical education in Brazil, with more than
50 partner teaching hospitals and clinics and 595 physicians and specialists in
their ecosystem. They have developed the first instructional medical web-series
created globally and have already been working on the second and third seasons.
They believe they are the first education group in Brazil to offer a fully
digital and customized service for medical residency exam preparation. All of
their undergraduate institutions are highly evaluated by MEC, with an average
Institutional Score (Conceito Institucional) rating above 4, out of a maximum
of 5. They have a strong combination of significantly low customer acquisition
costs. They have contracted growth visibility into medical schools that are in
the initial six years of operations as a result of the six-year maturation
cycle of their medical school seats. Successfully integrating the businesses
they invest in or acquire, allows them to offer an end-to-end physician-centric
ecosystem. The point of entry of one business unit is the point of exit from another,
which increases cross-selling and upselling opportunities. They believe the
combination of regulatory barriers, demand and supply imbalance and their
end-to-end physician-centric ecosystem are difficult to replicate and that it
would take a significant amount of time for competitors to reach the scale of
their operation. They have extensive capabilities in, and a strong track record
of, identifying, negotiating and successfully integrating acquisitions. Their
pipeline includes approximately 10,000 medical seats (each 1,000 medical school
seats represent a regulatory capacity of 7,200 students) that they view as
attractive potential targets, of which approximately 269 medical seats are the
subject of negotiations with signed, non-binding memorandums of understanding.
Their internal satisfaction survey conducted in 2018 showed employee
satisfaction levels of 86.3 out of a possible 100, based on several criteria.
They may not be able to identify and
acquire new medical higher education institutions or meet their strategic and
financial goals in connection with any business acquisition they seek. Their
revenues are highly concentrated in the tuition fees they charge for their
medical courses and other health sciences programs, and any economic, market or
regulatory factors adversely affecting such medical courses and health sciences
programs could lead to decreased demand in the medical and health courses they
offer, which could materially adversely affect them. If they lose the benefits
of federal tax exemptions provided under the PROUNI program, their business,
financial condition and results of operations may be materially adversely
affected. The unaudited pro forma financial information included in this
prospectus is presented for illustrative purposes only and may not be
indicative of their combined financial condition or results of operations after
giving effect to the Pro Forma Transactions.. . Due to the issuance of stock
options to members of their management team, a significant portion of their compensation
is closely tied to their results of operations and, more specifically to the
trading price of their Class A common shares, which may lead such
individuals to direct their business and conduct their activities with an
emphasis on short-term profit generation. They believe that their attrition
rates are primarily related to the personal motivation and financial situation
of their current and potential students, as well as to socioeconomic conditions
in Brazil. Their attrition rate was 18.2% for the year ended December 31,
2018. Significant changes in future attrition rates and/or failure to re-enroll
may affect their enrollment numbers, which may have a material adverse effect
on their revenues and their results of operations. Their faculty and administrative
employees are represented by labor unions in the higher education sector and
are covered by collective bargaining agreements or similar arrangements
determining the number of working hours, minimum compensation, vacations and
fringe benefits, among other terms. They could also be adversely affected if
they fail to achieve and maintain cooperative relationships with their
professors' or administrative employees' unions or face strikes, stoppages or
other labor disruptions by their professors or employees. They are subject to
supervision by MEC and, consequently, may suffer sanctions as a result of
noncompliance with any regulatory requirements. Some of the properties that
they occupy are owned by companies controlled by one of their controlling shareholders.
Failure to prevent or detect a malicious cyber-attack on their systems and
databases could result in a misappropriation of confidential information or
access to highly sensitive information. Their success depends on their ability
to monitor and adapt to technological changes in the education sector and
maintain a technological infrastructure that works adequately and without
interruption. The Brazilian federal government has exercised, and continues to
exercise, significant influence over the Brazilian economy. The ongoing
economic uncertainty and political instability in Brazil may harm them and the
price of their Class A common shares. In the past, Brazil has experienced
extremely high rates of inflation. Inflation and some of the measures taken by
the Brazilian government in an attempt to curb inflation have had significant
negative effects on the Brazilian economy generally. The Esteves Family and
Crescera, their largest group of shareholders, will own 100% of their
outstanding Class B common shares, which will represent approximately
95.1% of the voting power of their issued share capital following this
offering, and will control all matters requiring shareholder approval. This
concentration of ownership and voting power limits your ability to influence
corporate matters. Their dual class capital structure means their shares will
not be included in certain indices. They cannot predict the impact this may
have on their share price. Rating = 3