Now we know why they call him Fast Eddy. Within a week of being enveloped by a crisis of confidence and hit by margin calls, Eddy Groves has produced a remarkable response, an agreement for the partial sale of ABC Learning’s US childcare business that would enable ABC to more than halve its bank debt.
The proposed sale of 60% of the US business to Morgan Stanley Private Equity is a coup for Groves on a number of levels.
Groves has been a lot more enthusiastic about the US business than the market, which saw the rapid expansion into the US as over-reaching, diluting the quality of ABC’s Australasian businesses and, as the sub-prime credit crisis mounted, injecting leverage and risk into the group.
The deal with Morgan Stanley vindicates Groves. It values the US business at $US775 million ($842 million), or more than 14 times earnings before interest, tax, depreciation and amortisation (EBITDA). The recent $US1.3 billion acquisition by Bain Capital of another US childcare group, Brighton Horizons, was seen as the high-water mark for deals in that market. It was done on an EBITDA multiple of 13.1 times.
Not only have Groves and his advisers at Goldman Sachs JB Were and Austock managed to negotiate a sale at a remarkable valuation in the context of the current state of credit markets, but he will get to keep a 40% stake in what will become a leveraged but non-recourse joint venture with Morgan Stanley and also enter a somewhat broader alliance with the group.
ABC would extricate $750 million of cash from the US business to pay down more than 60% of its $1.2 billion of bank debt. There is also a deferred payment of $US30 million that would be payable after June next year, depending on the joint venture’s performance.
Morgan Stanley has the right to subscribe for convertible notes in ABC itself that would be equivalent to about 10% of its diluted capital. Its willingness to partner with and invest in ABC, or at least sign a memorandum of understanding that envisages that occurring, is a vote of confidence in the business and its management.
While Groves reiterated that ABC hasn’t breached its banking covenants and said the sale wasn’t a response to any pressure or suggestions from its banker it would, he said, be able to meet its covenants under the bank facilities even if the sale of the US business didn’t proceed. If the sale and note investment are completed, however, ABC’s borrowings would be reduced to about $450 million.
Groves’s problem wasn’t, it appears, related to a loss of confidence by ABC’s lenders but rather a loss of confidence by the sharemarket – exacerbated, it appears, by an assault by hedge funds.
Getting the debt in ABC down, demonstrating the value of the US centres and retreating largely to a core operation ought to calm the market and restore some value to a share price that has been decimated – which would also make the proposed convertible note issue more attractive from ABC’s perspective.
The de-risking of ABC, if the deal with Morgan Stanley is consummated, shows Groves in a rather different light to the image of the flashy empire builder he is usually associated with.
The alacrity with which he was prepared to accept that the meltdown in ABC’s share price had fundamentally changed the context in which the business operated, requiring drastic counter-measures and a retreat from the ambitions he had for the US business, suggests ruthless pragmatism and provides an interesting contrast with the actions of other groups confronted with similar predicaments.
This story first appeared on www.businessspectator.com.au