It’s the latest in a growing list of corporate wobbles, and like Allco, Centro and MFS before it, the punditry surrounding ABC Learning’s fall from grace is all but incomprehensible to anyone without a degree in banking and finance.
But worry no more. Crikey has waded into the arcane world of econo-speak and pulled out a few key phrases for those interested in learning (a tiny bit) more about what happened to the world’s largest childcare company.
ABC Learning empire: In all ABC Learning has 2,323 childcare centres. That’s 1,095 in Australia, 116 in New Zealand, 1,000 in the United States, and 112 in the US. When ABC was publicly listed in 2001, it had only 43 centres.
Aggressive debt funded expansion: As the phrase suggests, ABC’s rapid expansion in the US has been funded by other people’s money. As Centro discovered recently, that becomes problematic when those lenders get jittery, thanks to developments like the US credit crisis, and make it harder and more expensive to use their money. Concerns about the size of that debt also led to investors dumping ABC Learning shares in vast quantities.
Margin lending: Seems like a good idea at the time. Eddy Groves used margin lending to unlock his net worth in ABC Learning. To access that value, Groves borrowed money using his ABC Learning shares as security for the loan. However, the terms of the loan demand that if the value of those shares falls to a certain level, the lender requires Groves to top up with more security or give up the shares. Market analysts say the trigger point in this case was about $3. When it was reached on Monday, Groves needed to find large sums of cash in a big hurry to secure the loan, or transfer ownership of the shares to the lender.
Profit statement: Released on Monday night, ABC Learning’s half yearly profit statement triggered much of this week’s turmoil. The document revealed a 42% drop in half yearly profit, but that was not the only shortcoming. Bell Potter director of research Peter Quinton told yesterday’s Age: “When I went to the morning meeting the day after the profit result was announced … my opening comment was this result wins the award for the worst presented and most misleading result of the entire profit reporting season to date.” Not a good look with wary investors.
Share price: From a high of $8.46 in December, it plunged to an all-time low of $1.15 on Tuesday before climbing back to $2.14 before trading on Wednesday morning was halted. This week’s plunge wiped $780 million from the value of the company and drained $80 million from the personal fortune of Eddy Groves.
Exploding convertible notes: Points for a catchy name. An exploding convertible note is basically a debt instrument that gives the holder the right to convert the debt into a certain number of shares. The conversion rate might be fixed or vary over the term of the debt, or it may be exploding, which, as The Australian explained, can be “converted in the future into ordinary shares on a dollar-value basis, and if the ordinary shares drop in value, the number issued on conversion explodes. In the case of ABC, there appears to be no limit on how many shares could be issued on conversion.” This one’s not in the exam, but it is how Groves could lose control of the company. Though John Durie in today’s Australian has a different view.
Trading halt: Relating to its shares, this is what ABC Learning did on Wednesday morning “pending the release of an announcement by the company,” which is expected to be about the sale of some of its assets.
Temasek Holdings: The Singapore government-owned investment house which bought a 12% stake in ABC last year at $7.30 per share. At ABC Learning’s current share price, Temasek’s investment is down by close to $300 million. Some commentators have speculated that Temasek is a potential source of the asset sale speculation.