In the space of one earnings announcement whatever shreds of credibility Eddie Groves and ABC Learning Centres once had was stripped away and laid bare. Crikey has been openly sceptical of ABC Learning Centres for several years and by the looks of the child-care provider’s latest results, that scepticism has been well justified.
Yesterday, ABC announced that pre-tax profit for the December half slumped to $49.5 million (from $93.5 million the previous year). The profit fell despite revenue surging by 65 percent courtesy of ABC’s US and UK businesses. The share market has responded with alarming speed, absolutely hammering ABS to a low of $1.15 per share this morning (it has recovered slightly since then). Eddie Groves’ stake in his company has dropped from more than $400 million to around $50 million. Ouch.
The Singapore Government won’t be overly impressed, its investment corporation Temasek purchased 57 million shares at $7.30 each last year. The Singaporeans are now down more than $350 million on their investment in what won’t be remembered as one of the great investments of all time.
ABC’s problems stemmed from skyrocketing interest costs (up from $22 million to $81 million) and its dud investment in toy seller, Funtastic (which led to a $36 million write-down). ABC also recorded a negative operating cash flow for the period.
Despite the woes, ABC confirmed its earnings-per-share guidance of 15 percent improvement for the year. However, ABC’s results are even worse than they appear when you take into account the fact that $26.2 million of its $37.1 million first-half profit came from a successful legal action. This sounds very much like an “extraordinary” revenue and should have been clearly pointed out. Instead, ABC buried the fact in a footnote on page 14 of its results.
Aside from profit problems, ABC’s other problem is that it doesn’t have a particularly strong balance sheet. The company lists total assets of $4.5 billion – of which, more than $3 billion relate to intangible assets (which are predominantly child-care licences and a small amount of goodwill). As a result, ABC has negative net tangible assets.
Like Centro, ABC’s problems appear to have stemmed from an ill-timed US acquisition. In late 2006, ABC Learning Centres acquired more than 1,000 centres in the US from private equity firms shortly before the US dollar collapsed and the credit crunch occurred.
While the similarities with Centro are stark, Groves’ US deal actually reminds Crikey of that other famous boot-wearing CEO, Bernie Ebbers.
Ebbers was CEO of WorldCom MCI, the book-cooking telecommunications company which went bankrupt in 2002. Like Groves, Ebbers was a jovial and down-to-earth CEO who seemed more at home on a ranch than in a boardroom. That didn’t stop WorldCom from becoming a giant (in share market terms anyway). The problem for WorldCom was that its business didn’t make much money. To maintain favour with investors though, WorldCom continually acquired other companies (often, far larger than itself) to give the impression that it was growing so as to vindicate the lofty multiples. Ultimately, when WorldCom’s merger with Sprint collapsed, the emperor was exposed and WorldCom was exposed.
Groves’ US and UK acquisitions seem similar in nature. After more than a decade of explosive growth, ABC was valued by the market on an earning multiple of more than 30. This was despite Crikey pointing out that ABC’s profitability actually lessened the larger it became. To continue its growth and vindicate its hefty share price, ABC was forced to look abroad to feed its insatiable appetite for revenue growth.
In the end, ABC bought a thousand US child care-centres, paid too much, loaded up with too much debt and is now paying a very steep price.