Company to use $500m proceeds for inorganic moves, business expansion

TAL Education Group, a leading education firm, has got $500 million funding from Chinese investment firm Hillhouse Capital Group, according to people familiar with the matter.

TAL Education, which provides after-school tutoring services in subjects including mathematics and physics, is expected to use the funds to further its inorganic growth moves and for business expansion.

Earlier, TAL said that an unnamed long-term investor in the company will consolidate its equity stake and would desist from diluting its holdings for the next six months.

Though the investor was not named, sources familiar with the situation said Hillhouse is one of the long-term investors in TAL. Following the current transaction, Hillhouse will hold a roughly 7 percent stake in TAL, they said.

"There is a possibility that TAL will go in for a major acquisition after the new investment, with several key players in the online education startup sector being potential targets," the sources said.

Several Chinese online education startups are currently seeking new rounds of financing. Zuoyebang is planning to raise $500 million from Softbank, while online English firm VIPKID, according to online tech publication The Information, is looking to get $400 million to $500 million funding.

If the funding is used for merger and acquisition purposes, then DaDa English, an online English tutoring startup with a valuation of $300 million, would be a potential target. TAL has strategic investments in the Shanghai-based startup and the two firms are already cooperating with each other in education technologies, the sources said.

TAL earned net revenue of $586 million and profit of $72 million during the third quarter of the fiscal year, which ended on Nov 30, up 35.3 percent and 59.2 percent year-on-year respectively.

Despite its growth, a Beijing-based securities analyst pointed out that the company has been facing mounting pressures from both online and offline businesses.

Since the first quarter of the current fiscal year, the company has slowed its expansion in offline businesses, a major source of profit. On the other hand, its online business has been suffering from high user costs.

"In such a scenario, TAL is likely to boost its online business with the $500 million funding, so as to reduce user acquisition costs," the source said.

That said, the company may also opt for a combination of both - bolstering technologies and new investments and acquisitions. But no matter which way, the ultimate goal is to consolidate its online and offline businesses for future growth, he said.

Other sources, however, do not read much into the Hillhouse move. They consider it a routine market transaction by an investor.

As an investor, Hillhouse will keep a close watch on TAL's performance and continue to bank on certain businesses for sustained growth, they said.

TAL shares rose by 3.13 percent to $33.6 in premarket trading on Wednesday at the New York Stock Exchange, after falling by 1.93 percent to $31.95 on Tuesday.