What’s Idaho’s biggest downside to University of Phoenix purchase? Is it too big? | Opinion
When my wife and I owned our own business, a weekly newspaper in Kuna, we had one question that guided most of our biggest decisions: What’s the biggest downside here?
Especially when it came to a financial investment, we would plot out the worst-case scenario. If the worst-case scenario resulted in a couple hundred dollars or a waste of time and effort, we usually took the risk if it meant greater reward.
If, however, it meant crushing long-term debt that could bankrupt us, we stayed away.
After all, at the time, we had two sons, ages 1 and 4, and we relied on the business to pay our mortgage and put food on the table. A big decision that went wrong could have been catastrophic for our family.
And we never counted on “a sure thing.” No matter how promising the upside might be, we always tempered our hopes by seriously considering what the downside could be.
It worked well for us. We were always profitable — even through the Great Recession — and we sold the business five years later at a 90% premium from what we paid for it.
As former Idaho State Board of Education member Rod Lewis pointed out in a guest op-ed last week, the potential downside for the state of Idaho in its purchase of the University of Phoenix may be too great for Idaho to bear.
The University of Idaho is proposing to buy the University of Phoenix for a purchase price of $550 million, issuing $685 million in bonds that would be paid back over 12-18 years.
Part of the agreement includes a commitment on the part of the University of Idaho to pay up to $10 million per year for five years toward bond payments, if necessary.
“The worst case scenario clearly is that they (University of Phoenix) go out of business for some reason and are unable to pay the debts, and we’re on the hook for the $50 million,” University of Idaho President Scott Green told the Idaho Statesman in a video interview in December. “To me, that’s a scenario that is remote, and remote things happen, and so, we have to plan for and ensure that we could cover those types of things.”
But Lewis says that the state of Idaho ultimately could be on the hook for repaying that $685 million if Four Three, the nonprofit that would be formed to buy University of Phoenix, can’t make those payments.
Lewis, who was general counsel for Micron for 17 years and handled several mutibillion-dollar acquisitions, suggests the “corporate veil” that is meant to shield the University of Idaho and the state of Idaho from Four Three Education is full of holes. He suggests that the University of Idaho’s promise to pay up to $10 million actually serves to poke a hole in the corporate veil. Further, the Idaho State Board of Education would appoint the independent board members of Four Three Education and the University of Idaho, through the Board of Regents, would be the “sole owner” of Four Three Education, further poking holes in the corporate veil.
In other words, if things go south with the University of Phoenix, Lewis fears, the bondholders probably aren’t going to be satisfied with the explanation that Four Three Education is a separate, independent entity and that the University of Idaho and the state of Idaho are completely off the hook. At the very least, bondholders would have a case to make in court, a costly case to defend at taxpayers’ and students’ expense.
In the meantime, there are several unknowns that could point to a worst-case scenario.
Can the University of Phoenix continue to generate $800 million a year in revenue and $150 million of operating profit if it no longer operates as a for-profit company?
Will the University of Phoenix be able to maintain its student enrollment without relying on misleading advertising campaigns?
If not, what happens then? What if Phoenix’s revenues decline to, say, $600 million, wiping out essentially, that operating profit?
More than 1,200 University of Phoenix students recently had $37 million of student loans discharged over complaints that they were misled by deceptive advertising promises. What if more past students seeking to have their loans discharged win their cases?
Perhaps most importantly, who’s even asking these questions?
The deal has its potential rewards, but do those rewards outweigh the risks?
As my wife and I practiced when we owned our business, I think it’s time for more people to ask, “What’s the biggest downside here?”
In the case of the purchase of the University of Phoenix, I fear that it’s bigger than most people realize.
This story was originally published February 7, 2024 at 4:00 AM.
CORRECTION: This column has been updated to correct the bond amount to $685 million.
