Global Economics

Morgan Stanley Buys Into ABC Learning


The private equity company comes to the rescue of Australia's childcare centers, acquiring 60% of its U.S. business for a firm value of $775 million

Morgan Stanley private equity will acquire 60% ownership of the US businesses of Australia-headquartered ABC Learning Centres at a firm value of $775 million. It will also buy convertibles in ABC.

"The sale allows us to realise significant value from our US businesses, retain a material ongoing presence in this important market and substantially strengthen our capital structure," says Eddy Groves, CEO of ABC in a written statement filed with the Australian Stock Exchange (ASX).

Groves also mentions that the deal was transacted at a 14.1 times Ebitda multiple on trailing earnings for the year ended December 2007. ABC benchmarked the multiple against the price Bain Capital paid in January to acquire Bright Horizons Family Solutions. Bright Horizons provides employer-sponsored childcare and early education services and manages more than 600 childcare and education centres in the US, Canada, the UK and Ireland. Bain paid $1.3 billion, representing a multiple of 13.2 times the last 12 months Ebitda.

ABC US, the business which is being sold, contributed less than 20% of ABC's Ebitda in the last financial year and less than 40% of the firm's revenue.

ABC will net A$750 million ($692 million) from the cash injection plus another $30 million, payable post June 2008 if the business achieves agreed Ebitda targets. This includes a payment for senior, unsecured convertible notes to which Morgan Stanley will subscribe, representing 10% of the diluted equity capital of ABC. The terms of the convertible notes, including both conversion price and coupon rate, are yet to be negotiated.

ABC intends to use the proceeds to repay syndicated bank debt of A$750 million.

ABC is the largest listed childcare operator in the world, based on the number of centres. It commenced its operations in Australia and has grown through a combination of organic growth and acquisitions. ABC currently operates in Australia, New Zealand, the US and the United Kingdom.

On February 25 ABC declared results showing a 42% drop in net profit to A$37 million. The numbers were significantly below consensus estimates and led to widespread criticism of the management of ABC for not giving investors guidance regarding the fall in profits.

On February 26 ABC had to reassure shareholders in an ASX filing that its financial results had in no way impaired its ability to service its loans, which at the end of December were estimated at A$1.7 billion. ABC said that market rumours suggesting the company has to maintain a minimum market capitalisation of A$2 billion and is in breach of this covenant are incorrect. But ABC confirmed that directors' shares which had been provided as part of margin lending arrangements might have been sold by margin lenders.

ABC also yesterday announced plans to initiate an auction for the Busy Bees voucher division in the UK. This business provides tax-efficient childcare vouchers to employers, who offer them to their employees as a benefit in lieu of salary.

ABC' shares last traded on February 26 at A$2.14, before they were suspended pending an announcement. ABC is advised by Goldman Sachs JB Were and Austock.

Anand is a writer at FinanceAsia.com .

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