Is trouble brewing for ABC Learning?

By Stephen Mayne

December 26, 2007

Shares in ABC Learning are on the slide and there is talk of trouble in paradise for CEO Eddie Groves.

The pure shock associated with the debt troubles and share price collapse of Centro Properties Group last week has got plenty of people wondering if there are any other public companies facing debt challenges going forward.

One name that has come up a couple of times in dispatches is childcare behemoth ABC Learning, which on Monday fell another 2c in a rising market to a 30-month low of $5.18, capitalising it at $2.4 billion which is not that much when you consider debt is now pushing $2 billion.

The Singaporean Government can't be happy with its $403 million purchase of a 12% stake at $7.30 a share back in June. They've dropped a cool $117 million in six months.

Sentiment certainly wasn't helped by this notice on Christmas Eve revealing executive director Martin Kemp raised $5 million selling 600,000 shares on December 18. This was the same day that ABC Learning announced it had secured a $1.43 billion debt facility with eight banks - just days after many of the same banks pulled the plug on Centro.

We all noted the multi-function role that the Commonwealth Bank took with Centro as a major investor and lender and it seems a similar situation is playing out at ABC Learning, where the Commonwealth Bank funds management division has a 7% equity interest, whilst the bank itself picked up a shortfall of more than 30% on the $600 million unsecured convertible note issue that was offered in June.

CBA was also a big player in the debt rollover revealed last week, stepping up for $280 million, bringing its total ABC Learning play to more than $1 billion. Presumably it attempted to get Centro over the line as well last week, but didn't manage to persuade its fellow lenders and has now dropped $400 million on its equity exposures.

There is also talk about some tension within the family of ABC Learning CEO Eddie Groves and suggestions this might have an impact on the way various assets and shareholdings are structured.

The Courier Mail produced this very interesting story in September, pointing out that large related party transactions with Eddie's brother-in-law, Frank Zullo, for construction work were no longer being disclosed and often weren't tendered. The Rudd Government really needs to tighten up related party disclosure laws.

Just like Centro, ABC Learning does not rate highly when it comes to governance. We were most unimpressed after attending an ABC Learning EGM in Brisbane in 2006 to approve a $600 million placement.

When you add all this up, I reckon ABC Learning is a stock to be avoided, especially with a Rudd Labor Government now in office federally. Former Children's Minister Larry Anthony won't be much good on the ABC Learning board any more, nor will chairman Sally-Ann Atkinson, another former conservative politician.

The various state Labor Governments also don't like the way ABC Learning operates, so despite Kevin Rudd's promise to lift the child care rebate from 30% to 50%, the operating environment in Australia may not be overly friendly going forward.

Similarly, running the world's biggest childcare company out of Brisbane, with big operations in the UK and the US, is no easy task - especially when debt markets are freezing up and you need to fund a major rollout of new and redeveloped centres after a spate of ambitious acquisitions.