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ABC gets a harsh lesson in playing the game by big boys' rules

publication date: Mar 2, 2008
author/source: Richard Taylor

Australian company ABC Learning website still proudly says that they are 'the largest publicly listed childcare operator in the world'. While this may be factually accurate, it may not be so for much longer with a shoal of hungry predators circling the stricken company.

So what’s gone wrong? The most obvious answer is that ABC expanded too rapidly, particularly in the US, which led to a sizable shift in revenues to the second half of the year. This saw a 42% decline in operating profits to A$37.1m (£17.4) in the half year to 31 December 2007 and seems to have been something that many shareholders either didn't expect, didn't like or both. The underlying reason for the profit fall was the high costs of borrowing for the company's US expansion.

The net effect was that ABC whose shares were trading at A$7.57 last May had fallen recently to around A$3.70 prior to the recent stock exchange announcement about the fall in profits. This then saw the share price spiral down by over 70% to as low as A$1.15 before rising again to A$2.14. Unfortunately the floor in the share price seems to have been set when financial institutions started calling in margin loans to investors who owned ABC shares and some of these investors also just happened to be directors of ABC who had to sell 26.8m shares!

Worried by the fall and the huge turnover in ABC's shares, the Australian Stock Exchange temporarily halted trading in the company’s shares at the end of last month but not before one of the investment vehicles of the Singapore government, Temasek Holdings, had increased it's ownership to 14.66% after buying 8m shares at A$2.14. And this after they had paid A$400m for 12% of the company in May 2007 when the share price was at its peak. It was only in December last year that the company completed the re-financing of debt facilities with a three year syndicated facility of A$1.43bn (£670m).

While it is not yet clear what will happen to ABC, there are already rumours of interest by local groups like Macquarie Bank, as well as by international VC firms and sovereign wealth funds. What looks inevitable is that Eddie Groves, ABC's founder and CEO, may soon be out of a job. From a financial perspective it is understandable that a potential buyer or investor will want to install a new management team. If Eddie Groves goes, then it is likely his wife Dr Le Neve Ann Groves would also leave. Replacing a Chief Executive, even one as canny as Groves who started his business career as a milkman, is a fairly straight forward affair, but his wife, who is the education brain of the business may be harder to replace. On the ABC
Website, her profile states that, 'Le Neve assists in the development of and oversees all early childhood philosophies, policies, practices and curricular in the ABC Group'.

In the UK ABC's expansion has been rapid and in the UK they have purchased Nord Anglia's nursery business for £31.2m, and Busy Bees from Gresham Private Equity for £71m (ABC were rumoured to be circling several other UK nursery businesses including Kids Unlimited).

While things are very tough at ABC right now, we suspect Nord Anglia's CEO, Andrew Fitzmaurice is felling a sense of déjà vu - as well as one of relief at having exited the childcare market, one that seems to be the Bermuda Triangle of educational investments.

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