Ok, time (again!) to straighten out these "not held" jokers....

Ok, time (again!) to straighten out these "not held" jokers.

Wilson wrote: "G8 buys childcare centres privately at a multiple of four to five times EBIT but raises equity as a public company at an average of about nine times."

Several falsehoods in this sentence and throughout the Biz Spec article (same as they did last year on gem):

1. Buying centres at 4x ebit when the market values the firm at 9x ebit is called an accretive acquisition. That's good, not bad. An acquiring firm is in trouble if it does the opposite (which Wilson implies is ok), namely raise capital at multiples below the acquired firm's buy price multiple.

2. Neither gem nor any other ASX firm buys acquisitions "privately". All acquisitions are through the public company and immediately owned by existing shareholders. Existing holders are wlling to raise capitsl rather than or in addition to other sources to pay for their new acquisition.

3. Anyone buying new shares is NOT just buying the assets of the acquired centres (implied or stated elsewhere in this article). They are buying a piece of all the firm's assets. Thus, the term "arbitrage" is not descriptive of the cap raising transaction at gem or inany other cap raising.

4. Gem's acquisitions over the past year or more have been thru cash flow and debt, not cap raising. Gem did a cap raising nearly 2 years ago, but the Biz Spec article fails to acknowledge these alternate and more common funding sources (which suggests the writer began with a conclusion and selected only supporting facts).

Biz Spec has written the same argument on previous occasions over the past year (or longer). Looks like these guys flunked Finance 101 and higher units at uni.

Basic model is make or buy. Firms should buy rather than build when competitors sell out cheap enough and integration costs/risks are sufficiently low. Some of the top asx firms do this regularly (TCL, RHC, EHE, etc). But buying does have risks and requires close scrutiny by acquiring mgt (corp culture fit, cluster logistics, etc). Also, the buy strategy may eventually become untenable as others enter to bid up cheap centres (yes, affinity, that's you).

See posts back in feb15 and later on this matter, coincidentally responding to this same rag paper.

And posters, if you are shorting stock, declare your activity when posting.