acquiring sterling, page-14

Bit of misinformation on this thread however my 2c worth.

If GEM insiders were the reason for the share price run up then you are correct, they have in fact broken the law and should go to the big house. More likely the reason for the rally was the institutional roadshow through Asia that Canaccord took management on last week which attracted new money from Asian institutions.

Management and insiders will likely be eligible to participate in the share placement so having the share price run up into the issue would be nonsensical for them.

In terms of comparing GEM and AFJ, clearly they are chalk and cheese. I have met and spoken to management of both firms and let me just say it is clear which team has been running and aggregating child care centres into a roll-up vehicle for a bit more than 5 years now. Spend a bit of time in the annual reports, websites and offer documents and this will become more clear.

GEM has been a stellar performer but at close to 26x CY14 earnings (they report calendar or Dec year end) the stock is at a significant premium to both AFJ, and the broader market. This is clearly because the market finds the sector and stock attractive, they have faith in management and believe they can deliver the >20% annual CAGR (pre-Sterling) that consensus earnings forecasts have factored in moving forward. Obviously using a forward multiple looks far less demanding given the forecast earnings growth both pre and post the Sterling acquisition, if it is completed.

In terms of pricing put simply GEM trades on forward CY15 EBIT of close to 15x and is buying Sterling's assets at 5.7x CY15 EBIT so there is a pretty easy EPS accretive arbitrage there. What is harder to ascertain is the rate of change of earnings growth after CY15. Since the beginning of this year if you include the 91 Sterling centres and the 63 that were announced last month the company in 2 big licks has added more than 150 centres to its portfolio in just 3 months. This compares to a total of 177 centres in the past 3 calendar years (CY11-13).

Quite clearly given the scale of the business it becomes infinitely more difficult to grow at the same rate of change moving forward. GEM will have 388 centres post Sterling and AFJ has from memory 57 odd. How successful GEM will be at integrating centres, retaining staff and maintaining occupancy levels and passing on fee increases will remain to be seen over the next 12-18 months. That said both AFJ and GEM talk to an opportunity set of more than 4,000 fragmented centres so there is still plenty of opportunity but to say there is not competition for centres is just not true.

Guardian is a large well funded private equity aggregator. There are other private equity groups, private investors and offshore interest in the sector as well so there is still competition but perhaps not as significant price tension as Chris Scott may suggest this acquisition dictated especially given the fact that Sterling as a corporate entity didn't exist once the IPO fell over. As someone here rightly said it was just a serious of option agreements that if left until expiry would have left the individual owners of the groups of centres that Sterling would have bought with the IPO proceeds without a buyer and GEM could then have negotiated with them at potentially lower multiples, but that is now a moot point.

In AFJ the market quite rightly has not given the benefit of the doubt to a relatively new and as yet, unproven management team, strategy, and corporate structure. This would suggest that once AFJ make their inaugural acquisition and if the market can start to get more comfortable with management and their ability to execute that they can start to close their discount to the market, and also closest peer GEM.