Geoff Dixon and John Fletcher must look at Eddy Groves with a sense of envy. While they needed a private equity bid to get their share price going, celebrity CEO Eddy just needs to announce another “overseas expansion” and ABC Learning Centres’ share price rockets.

Before its latest announcement, ABC was trading at around $7.80 per share. After ABC announced that it was buying La Petite Academy, Busy Bees and Macquarie Leisure’s Australasian centres for a total of $680 million its share price leapt to more than $8.60. ABC was trading at less than $6.00 per share only three months ago. If the market is correct, ABC purchased the centres for a bargain price, which is quite an achievement considering the vendors were private equity firms (JP Morgan and Gresham) and a Macquarie satellite – none of which would be considered to be dills.

The AFR noted that Busy Bees’ tax efficient “voucher system” was another growth platform that ABC was keen expand globally. Groves claimed that the voucher system could generate significant cash flow and high growth. The voucher scheme seems to be a great idea (generating a “float” which can be used for investing, a bit like insurance or traveller’s cheques). One wonders though, why the world’s leading publicly listed childcare company couldn’t come up with its own voucher system, rather than having to purchase a UK firm for $177 million to access theirs.

An interesting point to note about ABC is that while its revenue growth has been phenomenal, its NPAT increase has lagged. In 2002, ABC earned $6.8 million on revenues of only $23.8 million (with an end of year share price of $2.64). Last year, ABC earned $81.1 million on revenues of more than $631 million.

Therefore, back in 2002, ABC earned 28 cents for ever $1 of revenue, whereas last year it earned only 12.8 cents for every $1 of revenue. Rather than becoming more profitable (due to synergies and economies of scale), ABC seems to becoming less profitable the bigger it gets. The AFR’s Fiona Tyndall noted that “some fund managers remain unconvinced, in fact highly critical, of the babysitting group” with Roger Montgomery of Clime Capital pointing out that “everyone is focusing on earnings growth, not profitability.”

Inevitably, there is a winner and a loser in every acquisition – either the purchaser overstates the potential synergies from the transaction or the vendor sells to cheaply – usually it is the former. That is why the market tends to discount the share price of an acquirer in most instances. By contrast, the market has added more than $310 million to ABC’s market cap, despite the company becoming less profitable as it increases in size.

As Crikey has noted in the past, ABC is priced for perfection, it can’t afford to slip up.

Peter Fray

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