ABC Learning centres shares rose almost 60% last week. Usually, such a gain would be greeted with joy by shareholders. Although we suspect ABC investors won’t be reaching for the Cristal just yet, given ABC shares are still almost 90% below their December 2006 peak. Most analysts have noted that ABC’s woes have been due to its botched US expansion, excessive use of leverage and increased local costs. However, child care insiders have told Crikey that all is not rosy with ABC’s Australian business model.

After listing in 2001, ABC went on an acquisition binge — not only did it conduct a company-altering merger with Peppercorn and Child Care Centres, but it travelled across the countryside, acquiring centres at will. Between 2001 and 2007, ABC announced a string of profit and revenue rises. ABC CEO Eddie Groves could do no wrong. Feted in the media, the former milkman turned ABC into the McDonald’s of childcare — the largest publicly listed childcare centre on the planet.

How did ABC achieve this feat? By overpaying for assets, excessive borrowing and constant issues of equity.

One childcare centre owner told Crikey that ABC Learning offered to purchase his childcare business for $1.2 million several years ago. ABC would have only been acquiring the business assets and associated goodwill — not the freehold to the property. The childcare centre owner told Crikey that at the time of ABC’s offer, his business was making around $150,000. That means ABC would effectively be purchasing a small business on an exorbitant earnings multiple of eight before it pays wages to replace the owner’s role.

ABC would also utilise the services of business brokers to purchase the centres, usually paying upwards of $100,000 to facilitate the sale.

When the childcare centre owner contacted ABC questioning the terms of the sale, ABC responded that the acquisition would be by way of cash ($150,000) and ABC shares (the remainder). How would ABC pay in shares? By issuing new shares to the childcare vendor – while this saves cash in the short-term, it dilutes current ABC shareholders’ claims to the company’s profits (and was possibly a reason why ABC’s return-on-equity dropped as it became larger). ABC was expanding its empire with this “money”, using its own inflated scrip to buy far-flung centres across Australia.

The childcare centre operator told Crikey that the prices paid by ABC meant that the only way the company could make satisfactory returns would be to dramatically reduce staffing and associated costs. ABC must have forgotten to look at Australia’s tight employment market. Increased costs caused ABC’s Australian centres to downgrade its earnings forecast for FY2008.

Meanwhile, two weeks ago, ABC announced that it will seize almost all of the Government’s increased childcare benefits by way of a 10% fee increase. That effectively means that the government is bankrolling ABC’s business incompetence with taxpayer funded largesse.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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