Milken, Ellison Childcare Deal Buoyed By Low Intergration Risk

Michael Milken and Larry Ellison's Knowledge Universe subsidiary Knowledge Learning Corp.'s (KLC) proposed acquisition of Aramark Corp.'s Educational Resources (AER) division carries low integration risk and will broaden customer demand for the childcare provider. These factors are reflected in Moody's Investors Service's Ba3 rating of the company's $260 million bank credit facility, which will help fund the $265 million acquisition. Compared to the usual merging of two companies, KLC offers a consistency in product that will allow the merger to take place without too much disruption, explained Paul Aran, v.p. and senior analyst at Moody's. "There is not the problem of two different products," Aran said.

Each day-care center is its own satellite with guidance from the same head office, he noted. "It's really just a question of applying their strategy." Additionally, the rating has been given a stable outlook reflecting Moody's faith in KLC's continual and diversified service demand, which is supported by the demographic of increasing numbers of dual working families. Speaking to what the company has to offer, Aran said, "They help children along in learning and behaving--all the things you would want as a parent."

The new bank debt is secured by first priority perfected liens on substantially all acquired property, a pledge of the capital stock and its subsidiaries. Since KLC leases a number of its facilities and has few tangible assets, the rating was influenced by the cash flow the company can generate, Aran said. KLC's debt to EBITDA is expected to be around 2. 7 times, with debt-to EBITDAR estimated at 5.2 times. According to Aran, given KLC's business the company is not over leveraged. KLC's customer base spreads across 33 U.S. states with operations in over 900 facilities. Moody's notes that once the merger with AER is completed, the company will be one of the largest childcare providers in the US. Officials at KLC could not be reached by press time.