(FORTUNE Magazine) – Edison Schools founder and CEO Chris Whittle has always argued that the education business could be lucrative. He kept the faith even as his company--which runs 130 elementary, middle, and high schools across the country--racked up several hundred million in losses and its stock tumbled from above $30 to the low single digits. Now it turns out Whittle was right--except he's the one getting a lot of the lucre, some of his biggest shareholders argue.

On Sept. 12 he announced that Edison had finally turned a profit: It earned $10.2 million in the final quarter of fiscal 2003. But the timing has left some shareholders steamed. Two short months before, Whittle announced that he was taking the company private. "As an investor in Edison, we think they continue to hold great promise," says money manager Zack Shafran of Waddell & Reed, whose mutual funds hold nearly four million Edison shares. "We're insulted by the fact that they want to buy this company back from us at a ridiculously low price."

Indeed, while investors like Shafran are getting a measly $1.76 a share and incurring huge losses, Whittle could eventually pocket more than $21 million on the deal (chump change by Dick Grasso's standards, but more than double what Edison earned last quarter). The buyout is being voted on early next month, and it is almost certain to pass, thanks in part to a special class of shares, held by Whittle and other insiders, that carry ten times the voting power of normal stock. "I'm disappointed in the shabby treatment of shareholders," says Trace Urdan of San Francisco--based ThinkEquity Partners, the sole remaining brokerage analyst following the stock. "This is a self-serving bid by management." While it's true that Whittle is also taking a hit on his shares, he's about to get a host of rich extras other investors won't.

A gifted salesman and an enormously likable personality ("spend an hour in a room with him, and you'll want to do what he tells you," says one Wall Streeter), Whittle has an almost Clintonian knack for coming out on top, despite controversy and fierce criticism. In the 1980s, his company, Whittle Communications, launched an educational-TV venture called Channel One. It was derided as a dubious attempt to get kids to watch commercials in the classroom--but he managed to sell it to K-III Communications (now Primedia) for more than $200 million. A planned TV network for doctors' offices burned through millions in investor money but never got off the ground. (Time Inc., FORTUNE's parent, made an investment in Whittle Communications and wound up writing it off.) After founding Edison in 1992, he attracted support from Republican governors like William Weld and Lamar Alexander, plus tens of millions in backing from the likes of J.P. Morgan and Microsoft co-founder Paul Allen.

In typical form, Whittle managed to catch the crest of the IPO wave in late 1999, taking Edison public despite a riptide of red ink. The stock soared, and Whittle borrowed nearly $8 million from Edison in late 1999 and early 2000 to buy stock in the company (he now owns 2.9% of Edison). "Those loans weren't my idea," says Whittle. "They were suggested to me by the board."

But a lack of profits and Edison's failed attempt to take over Philadelphia's troubled school system sent the stock plunging (see "Why Edison Doesn't Work" on fortune. com). By last November, Edison was hovering below 50 cents a share. That same month Whittle was busy renegotiating his contract. Instead of the $1 annual salary he had agreed to in late 2001 when Edison's shares were doing well, he would now get a base pay of $345,000. (Edison paid Whittle in another way too: Between 1996 and 2000, WSI Inc., a private company of which Whittle is the sole stockholder, received more than $1.5 million for "professional services," according to Edison's SEC filings.)

Despite strong revenue growth (Edison's sales last year totaled $426 million), early this year the stock was stuck between $1 and $2. Whittle began to consider taking the company private. In mid-July, Edison's board agreed to a bid of $1.76 a share from Whittle and Liberty Partners, a private-equity firm in New York. Liberty is paying $174 million. The $1.76-a-share offer represents a 39% margin over Edison's stock price this spring, "a premium that's considered above the norm for these kinds of deals," Whittle says. "We made a very significant effort to fetch the highest price." Based on the most recent quarter's performance, though, analyst Urdan contends Edison may be worth more like $3 to $4 a share.

For Whittle, who will continue on as CEO, the buyout is a coup. In addition to an immediate windfall of $4.2 million for all his Edison shares, Whittle will receive 3.73% of the now private company, with Liberty owning the rest. Plus, Whittle has the option to sell that stake back to Liberty over the next five years for up to $17 million, depending on Edison's performance. What's more, Whittle still has until 2004 and 2005 to pay back those personal loans, which now total $10.4 million thanks to accrued interest. Might those loans eventually be forgiven? Whittle says there's no plan to do that. But upon closing the deal, Liberty plans to lend Whittle another $1.68 million. If all that weren't enough, the deal also calls for Liberty to increase Whittle's base pay from $345,000 a year to "not less than $600,000," with the hike pro-rated back to July 1, 2003. Finally, Liberty will pay Whittle's WSI Inc. $587,968 plus accrued interest to satisfy an outstanding Edison note held by WSI.

Liberty's president, Peter Bennett, has no apologies for Whittle's payday. "We think Whittle's salary was below market for someone in that position, and his ownership stake doesn't go up much from what it used to be," he says. The Rev. Floyd Flake, a former New York Congressman who is a member of Edison's board of directors, also defends the CEO. "I don't know the exact numbers, but at the end it has to be fair to him," says Flake. "Chris has made a big investment. He's put all his intellectual and other capital into this process, and that has a value to it."

Whittle, for his part, insists he's suffered a big loss on his Edison shares just as other stockholders have (he says he's invested roughly $30 million in the company but won't disclose the size of his loss). "I have a decade of ways I've been supportive," he adds. "There were years I worked for a dollar, years where I took no bonus. If you look at the record, it's a pretty damn good one of how I supported the operation." If his critics looked at the past ten years, rather than just this deal, he says, "they would see it very differently." Shafran isn't buying it. "We don't believe that anybody deserves any special compensation just because of the difficulties the company has faced," he says.

One thing seems clear: We haven't seen the last of Chris Whittle. Says Jeff Silber, an equity analyst with Harris Nesbitt Gerard in New York: "If you look at his history, he's like a phoenix. Who knows what his next venture will be?"

FEEDBACK nschwartz@fortunemail.com