interview out with eddy, page-6

Yeah and i've down loaded it for you guys & I hope this will dispell rumours of all the downrampers & put abc back to where it shud be $3-4 plus, cheers

QUOTE
In an exclusive interview from Los Angeles, Eddy Groves gives his version of the events that bought ABC to its knees and, following his lightening-fast sale of US assets to Morgan Stanley Private Equity, outlines his bold plan to save the company.

Robert Gottliebsen: Hi Eddy and thanks for joining us.

That was a remarkable deal but who will manage ABC’s United States centres?

Eddy Groves: The current management team will still manage the centres and I’ll be heavily involved still with the process. ABC still has all the controls over the key areas, like education and curriculum, teacher training, all those key aspects of the operation of a child care company.

RG: Do you have any personal incentive deal with Morgan Stanley.

EG: No I don’t. No.

RG: With less equity, is your heart still going to be in managing ABC?

EG: My job is to make sure the company is there for the long term. I have a responsibility to all the families and the children and all the staff, and I take that very seriously. So regardless of my personal situation, that has been first and foremost on my time so my heart will definitely be in it.

RG: How do you feel about the superannuation and index funds who loaned ABC scrip to effect a bear raid on the stock and sell you out?

EG: Well, I can’t concern myself with anything that’s happened out there and frankly I haven’t really focused on it at all. I’ve just focused on what I needed to get done here at the time. When I have time to reflect I’m sure I’ll have some thought processes there.

Alan Kohler: Alan Kohler here Eddy. You’ve got a good price, was the buyer lined up before you went to the US?

EG: The board had thought of this strategy for a fair while and really it’s a very good strategy. At the end of the day, for us to own 40 per cent, my belief is it’s going to be 40 per cent of a much bigger pie. With the way the debt markets and the credit markets and equity markets are, it’s very difficult for any growth company to grow. That is part of our strategy in the United States, so now with the structure that we have we’ll be able to grow in a way that’s going to really require very little capital from ABC, if we continue to use debt in the joint venture.

So this is the strategy the board has looked at and then what happened was it just was facilitated a lot faster. We received a letter from Morgan Stanley on the night of Tuesday [February 26]. It was 11.00pm at night when it came in to us and it was very genuine, very sincere and gave us a lot of comfort. I acted on it straight away, jumped on a plane and consummated a deal inside of seven days.

AK: So Morgan Stanley initiated the approach, did they?

EG: They did, yeah.

AK: I was just wondering what sort of negotiating position you were in. Could you have walked away from that deal?

EG: Oh, we could have walked away from it. As we stipulated before about our bank covenants, we’re fine with our banks and we’ve got headroom with our banks.

But my view is the market right now has clearly changed dramatically over the last nine months. I mean if you go to the same people, 12 or 15 months ago it was all about growth. Companies were valued for growth. That’s probably changed now. I mean, companies are valued on amount of risk and amount of debt. You have to adapt to those market conditions and I’m not someone silly enough to think ‘look we’ve just got to forge ahead regardless without any consequences’. Markets are rewarding companies for little or no debt and that’s exactly where I’m going to take us – to a position where we have little or no debt in the next three or four months. By the time you see our June balance sheet it will be very, very clean and very, very lowly geared.

We haven’t lost a great growth opportunity. We’ve still got 40 per cent of this US business and I think it will be 40 per cent of a bigger pie with a financial powerhouse like Morgan Stanley.

AK: Will you have to sell more assets in order to achieve that low gearing you want?

EG: It was our intention to sell our UK voucher business at some stage because it’s non-core. We think there’ll be a significant capital gain there for us so we’re comfortable to do that. The other assets are the properties that are on our balance sheet which were never core, so by the time we clear those out we think it will be close to $450 million or $500 million additional to what we’ve just bought in, so we say goodnight to the debt.

Stephen Bartholomeusz: Eddy, the speed at which you moved last week was quite astonishing. CEOs just don’t normally relinquish their ambitions for their business quite that quickly. Can you take us through your thought processes last week?

EG: Tuesday hit us like a tsunami. I think there’s a lot of things that have happened in the marketplace, especially to ABC, which I think are highly unusual and one day, when I have time to reflect on that I will. It was like the perfect storm coming in.

When we were hit on Tuesday, I was still out talking to analysts and shareholders in Melbourne late on the Tuesday night when the letter came in from Morgan Stanley. We talked to them in New York. They said they could move very quickly but they would need to be in our US office the next day to start due diligence. Fortunately, that’s a very clean business in the United States. We’ve got all the data there to hand and our management team were able to put together a magnificent presentation and show them all of our data. I flew to the States on Friday and we began the negotiations.

You know, if anyone thought we were a forced seller, 14 times the last 12 months EBIDTA is a very good result when you compare that to what Bain Capital paid for Bright Horizons, which was 13.2 times.

We negotiated all the way through to Monday – or Tuesday Australian time – ready for stock exchange release after we consummated the deal.

All in all it was a remarkable and astonishing exercise, but what I know now is that ABC is safe and well bedded-down for the rest of its natural life because of that debt position.

That’s all that matters to me at the end of the day. There are 45,000 people that rely upon me around the world and I’m not going to let them down.

SB: One of the things that precipitated the events of last week was the view in the market that ABC's cash flow and its earnings lacked quality and transparency. Does taking the US business off the balance sheet improve the transparency and quality of your accounts?

EG: I think people are making a mountain out of a molehill when it comes to this. We flagged to the marketplace a discount on acquisition in the UK which was something we can’t avoid. When accountants and auditors tell us how we have to account, that’s what we have to do.

We had a mark-to-market writedown with Funtastic of $36.5 million. It was non cash. We had a one-off financing cost because of our new syndicated debt facility at $17.8 million. That was non cash in this half. That was paid last half but it had to be completely expensed in this half, which is abnormal.

Then we had another $8 million of one-offs, so it was about $62 million worth of one-offs and we had a one-off gain of $51 million. So there was about $11 million of one-offs in the negative and underlying EBIDTA was $158 million, which means the underline EBIDTA was about $169 million. The average in the marketplace is about $163 million so I think we were better than that.

I think there was enough noise, though in that half year result to create the negativity which fuelled the market to drive that price down and you know, there’s nothing you can do about that.

As I said, the underlying EBIDTA is strong and we confirmed our overall year’s EBDITA. I don’t know what else you can do.

AK: To what extent was that Tuesday tsunami as you put it due to your own financial position and the margin call or the margin position you had.

EG: You know, this hasn’t been something that’s just come on Tuesday. This has been something that’s been driven since last March or May, when our share price was $7. It has driven down, down, down, on constant discussion around debt. People saying “They won’t be able to syndicate the facility, they’ve got too much debt, the cash flows aren’t right”. Rumour after rumour after rumour and speculation after speculation.

I have spent 10 months of my life just constantly on the telephone dispelling rumours. That’s very difficult for a CEO when you’re trying to run the company as well. Crazy rumours. Stuff that’s just totally untrue. This is a process driven by companies or groups who are trying to continue to force our price down and continue to short stock.

June’s results were excellent results. Excellent results. And again, more rumours. Then it all focussed around syndication of debt, syndication of debt. We syndicated that debt. We did it with very strong banks in Australia. Then after that it was, OK, the syndication’s done, it’s on to the next rumour.

It was driven, driven, driven, to the point I knew half year was going to be trouble because in the first half of the year we have seasonality and we had all those one offs. And they saw the opportunity to throw the cat amongst the pigeons.

On top of that, we even had analysts that don’t do proper research and put into the marketplace their belief that the company is in breach of one debt covenant. That is without talking to the company. And then the question that they should have asked on the previous night, they asked at 11 o’clock the following day after they’d published their report. That’s what sent the scare into the marketplace – that we were in breach of covenants. Because when we put out a confirmation that we weren’t in breach of covenants the share price rebounded. So it was all about a debt story that we were going to struggle with the debt and we were going broke or whatever.

AK: I think that analyst was Citibank. Are you thinking of taking legal action against them?

EG: Mate, I wouldn’t want to comment on that now. I’m just telling you that when you have those types of situations, that’s a scary scenario isn’t it? Considering the person that called my margin loans in was Citi.

AK: Well that’s right. So this was a co-ordinated operation.

EG: I’m not saying that...

AK: Do you want to take this opportunity to clarify your own personal situation? What exactly happened with the margin call and were you a forced seller of stock?

EG: There’s a whole discussion about this going on everywhere right now. Margin loans are just another form of financing. When you buy a house for an investment do you pay cash for it? No. You borrow against it so you can negative gear it. There are tax advantages there and so people negative gear.

If the bank comes to you and says we want you to reduce your debt, if you’ve got cash to do it, you could reduce your debt. Same with margin loans. So you borrow against stock within the company to build your stake – everybody talks about CEOs not having enough interest in the company. My stake has increased dramatically since the first day it was listed and I put everything back into the company.

Now if I had a phone call on that particular day saying ‘can you reduce your exposure because the shares have fallen’, I could have written out some money for cash and reduced the stock. I never got that opportunity. We never even got a phone call. The stock was sold before I even blinked an eye.

AK: So you didn’t sell it, it was sold out from under you.

EG: Absolutely.

AK: And what’s your position now? Do you have any lending left against your shareholding?

EG: Look, I wouldn’t want to comment on the current position. I’m happy to do another interview with you in a little while once I get through all this. But you know, from what they’ve done by doing that, it’s put me in a terrible position. But I’ve got to live with that.

AK: Who’s they? Who did it?

EG: Citibank.

AK: Right. So they were your personal lenders.

EG: Yeah.

AK: And did you get any proceeds after the loan was paid off?

EG: No.

AK: So you just lost that stock completely.

EG: Oh yeah. Twenty years of work gone in a phone call. Off the back of a piece of Citi research.

AK: Do you intend to rebuild your stake?

EG: Oh mate, how do you do that?

AK: Go to another lender.

EG: Yeah, but you’ve got to have equity. How do you do that? Twenty years of work. You build a great Australian company that has done nothing but grow. We had an EBITDA of $3.2 million in 2001. We’re talking about an EBIDTA of $430 million seven years later. I challenge anyone to measure up against that. But not only that, we provide the best quality of early education anywhere in the world and no one can question it. And you know, I’m thankful that I’ve been away and I haven’t read one press report since I’ve been gone but to me it’s a distressing situation. But as I said, my focus is on what I need to do for the company. And I’ve done it. And I’m proud of it.

AK: Actually Steve do you want to ask a question here?

SB: Is there any completion risk to the Morgan Stanley deal?

EG: No I don’t think so.

SB: Do they have to raise debt in the markets?

EG: Yeah, they will go and raise debt in the joint venture. It’s not a lot. It’s going to be lowly geared.

SB: You seem to be fairly optimistic about the opportunity to expand out of that joint venture. So you haven’t completely turned your back on growth in the US.

EG: No absolutely not. No, no. We’ll be able to grow together. I’m very happy about that.

AK: What’s the pre-emptive rights situation? Do you have equal rights or are there any options over each other’s stake.

EG: No they don’t have an option over our stake. We can call on their stake in the third year.

AK: Do you think you’ll be a different CEO after this experience Eddy?

EG: Absolutely.

AK: How will you be different?

EG: I’m a lot smarter now. I’ve learnt a hell of a lot over the last eight to nine months.

AK: Can you tell us what you’ve learnt in the past two weeks.

EG: Oh man, I don’t know. I don’t know. I’ve learnt a lot. We don’t have enough time for all the things that I can talk about. It’s a best-selling book when I go to write it, let me tell you.

AK: Thanks very much Eddie. Good luck.