ABC Learning shareholders can simply look unto their company with the same sense of horror as one does when a tree has just fallen on their new BMW. As if things couldn’t get any worse: share price down 93%, chairperson gone, Australian operations director gone, founder’s equity stake sold by margin lender — the company is now being prosecuted by the ACCC for failing to abide by undertakings it gave during a 2004 merger.

In Federal Court proceedings issued yesterday, the ACCC has alleged that:

ABC persistently failed to comply with the court-enforceable undertakings it gave to the ACCC in December 2004 following its acquisition of the Peppercorn child care group, by not divesting two child care centres as required.

Even worse, ABC also allegedly:

[ … interfered] in the role of an agent (who was appointed in 2006 to expedite both sales)… by failing to reasonably assist that person to divest the two centres.

In 2004, ABC was approached by childcare entrepreneur Michael Gordon regarding a merger with his company, Peppercorn child care centres and another related company, Child Care Centres of Australia. The deal was extremely complicated and proceeded by way of two separate schemes of arrangement (first with Peppercorn, and then with CCCA). The matter was further complicated by Peppercorn and CCCA having a cross-holding which came about after Peppercorn agreed to manage CCCA centres (CCCA was owned by interests associated with Andrew Peacock and Michael Kroger). For his efforts, Gordon shrewdly walked away with $130 million and remains one of the few people to ever seriously profit from the child-care sector.

The deal was a company-transforming one. ABC grew from managing less than 500 centres to managing 778 centres Australia-wide. At the time, ABC was effectively taking over its two biggest rivals.

Naturally, the ACCC were somewhat concerned about the transaction. ABC argued that while it was the largest privately held child-care operator, the competition implications were minor given its share of the overall childcare market was diluted by community centres.

The ACCC came perilously close to blocking the transaction, but at the eleventh hour, allowed it to proceed on the condition that ABC divest a number of centres, including those in Geraldton which are the subject of the current claim. According to the ACCC’s claim, not only did ABC not comply with the orders (despite having four years to sell the centres) but also, it appeared to actively hinder their sale by diminishing the goodwill of the businesses.

Ironically, had the Peppercorn deals been blocked by the ACCC, ABC would probably never have attempted its ham-fisted US expansion, wouldn’t have over-loaded with debt and diluted its equity and would most likely be far more profitable than it is today. ABC slumped to an all-time low of 70.5 cents yesterday – at the time of its merger with Peppercorn, ABC was trading at around $3.00.

Disclosure: Adam Schwab worked on the legal team which advised ABC on its mergers with Peppercorn and CDC.