Updates on University of Arizona Global Campus Financial Terms

Author

Phil Hill
August 10, 2020

In a post last week regarding University of Arizona’s FAQ page on the agreement to purchase for-profit Ashford University and create UA Global Campus (UAGC), I asked a question about financial expectations.

This statement assumes that the upfront payments from Zovio (parent company of Ashford) will immediately go into UA’s general fund. But as I am trying to show above, that money will be needed for the massive effort to turnaround UA Global Campus enrollment trends. Again, why does UA think their situation will be different than Purdue’s? If they have an answer to this question, they should address it publicly. And I truly hope that UA leadership did their homework on Purdue Global finances since they are public now (you’re welcome).

My argument is that UA Global Campus cannot realistically be seen as a cash cow – someone is going to have to invest heavily in the new school. But we do not have the actual agreement available yet. Based on four sources of information, we now have a better picture of the financial assumptions behind this agreement.

EdSurge

The first one is from Jeff Young at EdSurge, who interviewed Brent White, the University of Arizona administrator who is leading the transition to this Global Campus.

But White argues that the University of Arizona has learned from Purdue’s experience, and that there are key differences in its financial arrangements. “We structured this so that a residual amount is guaranteed to Global Campus before Zovio would get any fee—or get reimbursement for its costs,” said Brent. In other words, no money goes to Zovio unless the new campus can pay its bills first.

“Everything for Zovio is at risk because we put our priority into making sure Global Campus has operating income to deliver” its courses, he added.

Meanwhile, Zovio will also pay Global Campus $37.5 million—“millions” of which will go back to the University of Arizona, says White—for what is effectively an affiliation and trademark licensing agreement.

This is different than the Purdue Global deal, in that UA Global Campus would get its operating costs and “residual amount” before Zovio would get its OPM costs reimbursed, and before the 19.5% revenue sharing is enacted.

Internal Committee

A second source that provides some clarity comes from an internal email obtained by this blog from the Strategic Planning and Budget Advisory Committee (SPBAC) and Provost’s Council, sent out last Wednesday. In the section describing UA Global Campus financials [emphasis added]:

The UA has signed a commitment to this deal which will be finalized in December 2020 if approved by WASC.If the deal is executed the UA will purchase the assets of Ashford for $1.

– At closing, the UA will receive $54M at closing in working capital and in pre-payment toward a 15-year income guarantee. (A current draft proposal would have $20M to come directly to the UA with $34M left in UA Global Campus for working capital, curricular improvement, and to support student success. The $20M may be used for furlough relief, scholarships, or other pressing needs.)

– In years 1-5, UA Global Campus is guaranteed $25M/year minimum operating capital ($37.5M of this, or 1.5 years of revenue, will be paid at closing as part of the $54M payment).

– In years 6-15, UA Global Campus is guaranteed $10M/year minimum operating capital.

Anonymous Source

Based on discussions with a third source (paraphrased below), I believe the UA Global Campus distribution waterfall generally follows this form:

  1. The first dollars go to UAGC to cover expenses for the academic side of things — professors, administration, leases, etc.

  2. The next $25 million goes to UAGC under the contract, which guarantees $25 million per year for the first 5 years, and $10 million per year for the next 10. The $37.5 million cited in the news reports is a prepayment on the first 1.5 years of this.

  3. The next dollars go to Zovio to reimburse its costs of providing OPM services.

  4. Zovio then gets 19.5% the total revenue, if the residual funds are available.

  5. The remaining funds (if any) stay with UAGC, which it can invest in itself, or send back to the University of Arizona proper in the form of an affiliation / trademark licensing agreement, or some combination of the two.

Zovio Source

A final piece (for now) comes from Zovio based on an email conversation.

The difference is that UAGC has a residual guarantee from Zovio so it can’t be negatively impacted if there’s a need to spend $100M to turn around marketing and enrollment. Effectively their net income is protected and can’t go negative. So the risk is entirely on Zovio. Financially, it’s all upside for UAGC.

Summary

Combined, this information describes a situation where the University of Arizona is leveraging $37.5 million of pre-payments along with other Zovio guarantees, such that $20 million may be transferred to the main campus at closing. Furthermore, there seems to be some financial guarantees preventing UAGC from directly losing money.

Left unsaid, however, is whether the form of these guarantees is that Zovio would forego income in the case that UAGC did not make sufficient revenue to pay operating costs, or whether Zovio would be on the hook to invest in heavier marketing spend, or whether that choice is up to UAGC or Zovio.

Think of it this way – there are a lot of assumptions of operating income being generated to pay the $25 million guarantees, and the 19.5% revenue share, and the final residual income. Zovio (previously named Bridgepoint Education) has not been able to generate even the $25 million in operating income since at least 2013.

I stand by my previous claims that this deal seems much better for Zovio than for the University of Arizona, and that UA should focus first and foremost on serving their current students, faculty, and staff. I also stand by my belief that UA Global Campus will require significant investments in marketing and student recruitment if it is to reverse enrollment declines and establish the new brand. Somebody will have to pay those costs, or UA Global Campus will continue to decline.

What I acknowledge, however, is that this UA Global Campus deal has some material differences than the Purdue Global deal in its distribution waterfall as described above, and that the immediate financial risk of a net operating loss will impact Zovio much more than the University of Arizona.

We still need to see the actual Transfer Agreement, which I have been told to expect in roughly three months.