2U Inks $800M Deal to Acquire edX; Shares Rise

2U, Inc. (TWOU), a provider of education technology for non-profit colleges and universities, inked a deal to buy most of the assets of edX, including the edX brand, website, and marketplace, for $800 million in cash. Edx is a non-profit, massive open online course (MOOC) provider founded by Harvard and MIT.

Shares of 2U rose 4.2% to close at $42.08 on June 29. (See 2U stock chart on TipRanks)

The acquisition is expected to close within 120 days, subject to certain closing conditions. The deal will be funded with existing cash, which includes the proceeds from a $475 million senior secured Term Loan B, into which the company entered on June 28.

The combined entity will reach over 50 million learners, serve more than 230 partners, and offer over 3,500 digital programs through the free-to-degree online education marketplace.

2U CFO Paul Lalljie said, “We believe today’s transaction enhances 2U’s momentum, as our business continues to perform well and our second-quarter results remain on track with our expectations.”

Anant Agarwal, Founder and CEO of edX and MIT Professor said, “2U’s people, technology, and scale will expand edX’s ability to deliver on its mission of providing access to high-quality education to enable all learners to unlock their potential.”

For the fiscal year ended June 30, 2020, edX reported revenues of $84.7 million and an operating loss of $17.4 million.

Meanwhile, 2U reported a Q1 loss of $0.12 per share and revenue of $232.5 million, up 32% year-over-year. For fiscal year 2021, the company forecasts revenue and net loss to fall in the range of $925-955 million and $175-$165 million, respectively.

The acquisition of edX will expand 2U’s leadership position and is expected to drive 10%-15% annual marketing cost efficiencies.

Additionally, the acquisition will be accretive to 2U’s adjusted EBITDA in fiscal year 2023, while dilutive to 2022 adjusted EBITDA by a low single-digit percentage.

Following the news, Barrington analyst Alexander Paris reiterated a Buy rating on the stock. He noted, “With strong growth across all three of its primary products (degree programs, short courses, and bootcamps), which we believe is sustainable given the contractual nature of its business, and increased interest in online education programs overall; expanding profitability and the strategically important proposed edX acquisition, we are reiterating our Outperform investment rating.”

Paris assigned a price target of $65 to TWOU, which implies 54.5% upside potential from current levels.

Based on 4 Buys and 1 Hold, the stock has a Strong Buy consensus rating with an average analyst 2U price target of $59, implying 40.2% upside potential from current levels. Shares gained 10.8% over the past year.