The IDP Education Ltd (ASX: IEL) share price is rocketing higher on Friday.
At one stage, the language testing and student placement company's shares were up 20% to a record high of $29.49.
When the IDP Education share price hit that level, it was up 43% since the start of the year.
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Why is the IDP Education share price rocketing higher?
Investors have been buying the company's shares after both the market and brokers responded positively to the announcement of a new acquisition.
After the market close on Thursday, IDP Education revealed that it has entered into a binding agreement to acquire 100% of the British Council's Indian International English Language Testing System (BC IELTS India) operations for 130 million pounds (~A$240 million).
IDP Education and the British Council currently both administer IELTS tests in India, operating parallel pan-Indian distribution networks. However, post transaction, IDP Education will be the sole distributor of IELTS in the key Indian market.
The release explains that the transaction is estimated to be approximately 13% earnings per share accretive (pre-synergies) on a pro forma calendar year 2019 basis. It also sees scope for material combination benefits, with estimated run-rate synergies of A$6 million to A$8 million expected to be delivered within 24 months of completion.
In addition to the acquisition, the company provided a brief update which revealed that trading conditions have improved in recent weeks.
Broker response
A number of brokers have responded positively to the news. Morgans, Morgan Stanley, UBS, and Goldman Sachs have all retained their equivalent of buy ratings this morning.
In respect to the latter, this morning Goldman Sachs reiterated its buy rating and $29.90 price target on the company's shares.
It commented: "In our view this transaction makes good strategic sense for IDP, with India the largest IELTS market globally (by volume). The company has guided to A$6-8mn synergies, which in our view should be achievable given IEL's knowledge of BC's Indian operations and its position in the market. We think India presents a strong long-term growth opportunity for IDP. Economic growth, increasing wealth and a relatively young population in India provide a positive demographic backdrop for an increasing propensity to study abroad."
Goldman also sees further opportunities for consolidation.
"Although India is the key market for IDP, we note this transaction could also open up the opportunity for further IELTS consolidation between IDP and BC in other markets. IDP and BC compete for delivery of the test in markets such as: Canada, USA, South Korea, Hong Kong, Singapore and other major South East Asian countries. IDP exclusively delivers the test in Australia and Iran, while BC controls distribution in the UK and China," the broker added.
Finally, Goldman remains positive on its outlook. It explained: "We believe IELTS testing volumes should grow at mid to high single digits over the medium term as global economies reopen. The test is approved/required not only for international students wanting to study in Australia, the UK and Canada but also for work visas and other migration. Any further consolidation of the delivery of the test could be earnings accretive for IDP."
