Temasek to invest in Australian childcare operator

ABC Learning Centres will place A$401.5 million in new shares with a Temasek subsidiary, while also issuing A$600 million in convertible notes.
A rising star in AustraliaÆs corporate landscape, ABC Learning Centres has announced a A$1 billion ($820 million) financing package that includes a placement of new shares to Everitt Investments and a subordinated resettable convertible note programme. It is also renegotiating A$1.44 billion worth of existing bank facilities.

ABC Learning Centres and its charismatic chief executive Eddy Groves are credited with bringing corporate controls and discipline to the multi-billion dollar childcare industry. Since it listed on the Australian stock exchange in 2001, the company has expanded the number of childcare centres it runs from 43 to 2,305, with many of these in new markets like the UK and the US.

In announcing the financing package yesterday, Groves said some of the proceeds will be used to expand further into the large and fragmented US childcare market where its most recent investment was the purchase of Chicago-based La Petite for $330 million. The rest will be used to pay off existing senior debt.

Everitt Investments, a wholly owned subsidiary of Singapore investment vehicle Temasek, will purchase 55 million new ordinary shares at A$7.30 a share for a total outlay of A$401.5 million. The deal will give Everitt a near 12% stake in ABC on a diluted basis, making it one of the largest minority shareholders in the company. Not a lot of detail has been given about the investment, accept that it still requires approval from shareholders and the Foreign Investment Review Board.

The A$7.30 price on the shares represents a small premium to the companyÆs closing price of A$7.24 yesterday when the stock was placed in a trading halt prior to the funding announcement.

The convertible portion of the deal is being arranged and underwritten by the Commonwealth BankÆs equities arm, CommSec. The notes will be issued at A$100 each with a semi-annual floating-rate cumulative coupon paying 250bp over six-month BBSW. The notes carry a nine-year maturity, with an expiry date of June 2016 and a first reset date of June 2010. If converted, noteholders will receive ordinary shares priced at a 2.5% discount to the volume weighted average price of the shares in the 20-trading days leading up to conversion. Though, ABC has the right to redeem the notes for cash at face value on a reset date or when a tax or takeover event occurs.

The convertible offer is due to open on June 6 and close on June 13. The minimum investment is A$50,000.

ABC operates its daycare centres like semi-franchises with the freehold property of the centres owned by private third party landlords and private trusts, and leased by ABC. Its recent offshore acquisitions, aside from La Petite, have included the ú71 million purchase of Busy Bees in the UK, and the acquisition of Learning Care Group in the US where it was the third largest operator in the country with 467 centres. At the end of last year, the total cost of all ABCÆs cash acquisitions was A$680 million.

The drive to expand offshore has come from a lack of growth opportunities in the domestic market. ABC is already the dominant player in Australia. So, in September 2004, when ABC bought its largest local competitor Peppercorn Management Group, the competition watchdog stepped in, only allowing the acquisition to go ahead after ABC closed some centres in certain areas and promised not to open new centres in other areas.

The companyÆs financial results have been boosted by its accretive nature with Ebitda up 86% in calendar year 2006 to A$138.1 million and net profit up 57% to A$64.2 million. The company forecasts a rise in Ebitda for 2007 of more than double to A$305 million. Shareholders have benefited handsomely from these results, achieving total shareholder returns of 32.1% over three years. Groves is often portrayed as the poster-boy for entrepreneurial spirit in Australia û a self-made businessman who is making his mark on the global stage.

But the company has also attracted its share of controversy. There is a perception that ABC is profiting from the needs of families with young children, with some arguing that there is a tension between the obligations of educating pre-schoolers and rewarding shareholders. ABC generates a large portion of its revenues from government funding û as much as 40% in Australia and 25% in the US û leading to criticism that its profits are heavily subsidised by taxpayers. There have also been reports of over-stretched workers, donations to local policymakers to push through development approvals, and legal action threatened against parents who complain about the service.

More recently, the companyÆs share price has stagnated. From a high of A$8.80 in December 2006, ABCÆs shares dropped to around A$6.65 in March and have pitched and dived since then. Shareholder returns for the past year are down to 1.8%. Analysts are keen to see whether the new capital management plan and the release from some of its debt obligations will improve ABCÆs performance.

The A$400 million placement to Everitt will bring the companyÆs gearing ratio down from 46.9% to 35.9%.
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