U of Idaho says deal to buy the U of Phoenix accounted for risk of student-loan costs

The University of Idaho had a laundry list of things to consider as it moved through initial negotiations with the University of Phoenix.

The Moscow school would need to create a nonprofit organization to buy the for-profit University of Phoenix, and it’d need to hire a slew of financial advisers and lawyers to look at the multimillion-dollar deal from every possible angle. Those advisers would also be contracted to perform due diligence and risk analysis.

President Scott Green told the Idaho Statesman that the university has studied all the potential risks of buying the University of Phoenix and is confident that the U of I’s deal mitigates any risk to the university from Phoenix students citing fraud as they demand relief from student-loan debt. The Federal Trade Commission and U.S. Department of Education say the school misled vulnerable students a decade ago about their prospects for employment after earning Phoenix degrees.

U of I president: ‘I knew what had to happen’

When the U of I announced in May that it planned to buy the online school for $550 million, it said it was first approached about the acquisition in March. Now, the university says preliminary discussions began after it was contacted regarding the possible opportunity “on or about” Feb. 1.

“We were first approached in early February 2023, and while there were preliminary discussions with the seller and the sellers’ representatives to understand the opportunity and determine if it was something we would be interested in, we entered into negotiations and due diligence in earnest mid-March,” the U of I’s FAQ page now says.

The university held three closed meetings with the State Board of Education, on March 22, April 25 and May 15, to discuss the acquisition.

The State Board’s decision to approve the deal came less than a month after University of Arkansas system board members narrowly voted to reject a similar measure.

Green said in an interview that his experience with high-dollar transactions and the university’s public-private partnership with its utility — another complicated transaction, he says — may have helped the U of I stand out as a compatible buyer.

The U of I signed a 50-year deal with Sacyr Plenary Utility Partners Idaho and McKinstry in 2020 to operate electric, water and other utilities across the Moscow campus.

After graduating with an accounting degree from the U of I, Green attended Harvard Business School and spent the better part of the last two decades in various C-suite roles.

“Fortunately, I’ve done this kind of work before,” Green said. “So I knew exactly what had to happen, and I was able to get the right team on it.”

He said the University of Arkansas wasn’t able to strike a deal with Phoenix after two years of negotiations because of “political issues.” Green said the U of I has kept State Board members apprised of its intentions from the start, which has helped them feel more secure about the transaction.

“We got to a place where we’re very comfortable, where our board’s very comfortable,” Green said. “It was unanimous.”

U of I administrator signed confidentiality agreement

Emails obtained by the Statesman under the Idaho Public Records Act show that Brian Foisy, vice president of the division of finance and administration at the U of I, was working with Tyton Partners, an education advisory firm headquartered in New York, as early as March to submit a nonbinding indication of interest for the potential acquisition.

The indication of interest would cover three main areas: proposed valuation, intended structure and timeline. It was submitted March 23.

Tyton Partners is providing financial advisory services for the sale on behalf of the University of Phoenix.

Records show that Foisy signed a confidentiality agreement with the firm dated Feb. 2. Tyton Partners reminded him of the agreement while corresponding a month later.

“You may not contact any present or past employee, corporate partner or student of the university unless specifically authorized in advance,” the confidentiality agreement said. The agreement was also signed by others involved in the initial meetings.

What about Phoenix students alleging fraud?

As the U of I worked through the initial stages of its plans to buy, it hired Boise law firm Hawley Troxell to provide legal advice on the corporate structure of the newly formed nonprofit and its proposed bond financing.

The nonprofit is named Four Three Education after Idaho’s status as the 43rd state in the union. The U of I set up the nonprofit to limit its own liability in purchasing the online, for-profit school.

The U of I plans to finance the deal with nontaxable and taxable bonds that are separate from the money used to fund the university’s budgets. The purchase price of the University of Phoenix is $550 million, but the seller would provide $200 million in cash that would transfer to the nonprofit once the transaction is complete, reducing the net cost to $350 million.

The U of I says the cash transfer mitigates the risk of potential borrow defense claims. Borrow defense claims allow students who were defrauded to seek debt relief for their loans.

The school could be on the hook to the federal government for the University of Phoenix’s potential discharged federal student loans, according to a letter sent to Green from three Democratic U.S. senators.

That includes 38,210 pending claims and 34,940 others that are eligible for relief as of Aug. 9, according to information provided by Federal Student Aid, an office of the U.S. Department of Education, through a Freedom of Information Act request submitted by the Higher Education Inquirer, a blog run by New Jersey resident Dahn Shaulis about higher education.

That happened to the University of Arizona when it acquired the online, for-profit Ashford University in 2020.

In a July memo, Hawley Troxell penned a legal opinion that said the transaction poses no financial risks to the state because the liabilities would be incurred by the nonprofit, not the U of I. Green also said in a letter to the three senators, provided to the Statesman by a spokesperson for the university, that the U of I is well prepared for any potential liabilities that may accompany the transaction.

“Student loan debt is certainly something we pay attention to at U of I,” Green wrote. “It is a conversation we have had with the new management of University of Phoenix and was considered as part of our due diligence.”

Regardless of its due diligence, which Green says was performed by “the best minds in the country,” the university doesn’t seem to have an exact number that quantifies all the potential risk involved in the deal. While the University of Phoenix’s management believes the U of I’s exposure is about $1.5 million, he said, other consultants have estimated that it’s more like $7 million.

The U of I does have a liability insurance policy that would cover up to $25 million and is looking at quotes for catastrophic risk insurance.

“We want to be protected,” he said. “We believe we can manage that risk.”

However, should Four Three Education miss payments on debt related to the transaction, the U of I has agreed to fork over $10 million a year toward bond repayment.

Green says ‘all risks’ are ‘quantified and mitigated’

The U of I’s FAQ page about the deal addresses the potential for more claims.

“If University of Phoenix were to face a (borrow defense claim) recoupment demand based on a large-scale loan forgiveness action similar to Ashford’s, the University of Phoenix is prepared to vigorously challenge such action on appropriate grounds,” the FAQ page says.

The U of I also worked with Hogan Lovells, a global law firm with expertise in higher education law, to get a better understanding of income tax laws that apply to the nonprofit. It then hired Ernst & Young, a prominent national accounting firm, to conduct financial due diligence.

The due diligence includes a full analysis of the University of Phoenix’s earnings and valuation, as well as an analysis of the legality of forming the nonprofit and the proposed bond financing.

“We’ve done an awful lot of due diligence,” Green said. “The due diligence packet is probably an inch thick. We’ve got all the risks that might be there identified, quantified and mitigated.”

Green said that at any point along the way, the State Board could’ve put up a red light, but it didn’t.

“They understand the value of this deal to the state,” he said. “We’ve done all the right work to get this done and to ensure that this is the right decision for the University of Idaho.”

Editor Chadd Cripe contributed.

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