If financial disaster can strike down golden boy Eddy Groves and his entrepreneurial showcase ABC Learning Centres, who is next and how extensive is the problem?
The good news is that margin calls are not the next big shock around the corner. The bad news? There could be many other entrepreneurs facing a similar financial battering.
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Yesterday ABC Learning Centres shares went into a trading halt after the worst one-day share price fall triggered margin calls on the director and some board members.
Groves astonished the market when he revealed how many of the directors’ shares were held in margin lending accounts. Of the 21 million shares still held by directors, only 4% are not subject to margin calls. The disaster was spiked by a poor half year result that was badly handled by Groves, who is used to reporting good news.
So who is next to be caught out? And how can you tell?
- Some of listed companies are going to be reporting poor results this year.
- Some still have an entrepreneur with a substantial shareholding.
- Some of these entrepreneurs are asset rich but cash poor and have used margin lending to ensure their shareholding does not get diluted during a funding round.
- Some may have been buying up their shares to prop up prices as their share price fell last year.
All of these entrepreneurs should be aware that the hedge funds are circling and attacking anyone that has margin loans. When the vultures short sell and force prices down, triggering margin calls, they can make a fortune.
ABC will survive the financial chaos; Groves may or may not survive at ABC. After all, the business is sound even if its cost base is rising. It has the right demographics in a growing market with government funding guaranteed.
But it also sends a lesson to any small listed company – get your house in order. Continuous disclosure, clear accounts, reasonable gearing and good results will offer protection. And remember, be very careful how you report any news; good or bad. The game here is not to spook the market.