report here

22 April 2008
ASX ANNOUNCEMENT
A.B.C. LEARNING CENTRES LIMITED (ASX:ABS)
ABC signs definitive agreement for US Joint Venture with Morgan Stanley Private Equity
Sale of 60% of US business
No issuance of convertible notes
Reduction of net debt by A$485 million
Changes to RMC structure in Australia
Strong outlook for underlying earnings growth in FY09
Changes to composition of board and management
US Transaction
Introduction
A.B.C. Learning Centres Limited (“ABC” or “the Company”) has signed a definitive agreement with Morgan Stanley Private Equity for the sale of a 60% interest in its US business, Learning Care Group, Inc. (“US business”), in a transaction that values 100% of the US business at US$700 million.
The transaction will reduce ABC’s net debt by A$485 million1, with an additional US$30 million payable shortly after 30 June 2009 by way of an earn-out. In addition to the net debt reduction, ABC will retain US$185 million of ordinary equity and US$20 million of preferred equity in the US joint venture. ABC has a call option to buy back Morgan Stanley Private Equity’s interest three years after closing.
Eddy Groves, CEO of ABC, said, “The transaction represents an excellent opportunity to crystallise the value of the US business and reduce ABC’s gearing, while maintaining exposure to the upside potential of the attractive US childcare market.”
“Morgan Stanley Private Equity brings not only significant financial firepower, but also a real commitment to growing the business to a level that would not have been achievable by ABC standalone within the same timeframe.”
1 Net debt reduction of A$485 million consists of cash proceeds of A$432 million and A$59 million of capitalised lease obligations transferred to the US business, less A$6 million cash balance remaining in the US business following transaction close. Cash proceeds are derived from a transaction value of US$700 million, less the deferred payment of US$30 million, less ABC’s retained equity in the joint venture of US$185 million, less the preferred equity ABC retains in the joint venture of US$20 million, less capitalised lease obligations transferred to the US business of US$55 million and less deferred payments for acquisitions of US$8 million. Assumes an exchange rate of 0.93 US$/A$.
“We have undertaken a comprehensive process to realise the value in our US business, achieving a price that compares favourably with similar transactions that were completed in more conducive market conditions.”
“This transaction significantly de-risks our business, and addresses concerns about the capital required to grow the US business. It also allows the management team to spend more time focusing on the Australian and New Zealand operations.”
ABC and Morgan Stanley Private Equity expect the transaction to close within 90 days, following regulatory approval, funding of the committed financing facility for the joint venture and consent of ABC’s senior lenders.
Overview of Transaction
�� Represents an Enterprise Value of US$700 million (A$753 million), compared with US$775 million as per the announcement on 5 March 2008, reflecting the deterioration in credit markets since that time
�� Sale price implies a multiple of 12.7 times EBITDA of the last twelve months, comparing favourably with recent transactions in the sector
�� Will reduce net debt by A$485 million, with an additional US$30 million payable at the end of FY09 by way of an earn-out
�� ABC retains a 40% interest in the US business and has a call option to buy back Morgan Stanley Private Equity’s interest three years after closing
�� Does not represent a trigger event which would allow the holders of ABC’s existing reset convertible notes to require an exchange of their notes
Funding of Joint Venture
The joint venture will be funded through an equity contribution by the partners of US$432 million2, comprising US$247 million2 cash equity from Morgan Stanley Private Equity and a roll-over of ABC’s 40% stake valued at US$185 million. In addition, ABC will retain US$20 million of preferred equity.
In addition, Barclays Capital, the investment banking division of Barclays Bank PLC, has committed to provide US$215 million of first lien facilities comprised of a US$40 million revolving facility and a US$175 million term loan. The revolving facility will be undrawn at close.
Barclays Capital has also been engaged by ABC and Morgan Stanley Private Equity to arrange up to US$55 million of potential mezzanine financing which would reduce the partners’ equity contribution and result in incremental cash proceeds to ABC of approximately A$24 million.
2 Excluding the US$30 million deferred payment.
If the US joint venture is unsuccessful in securing mezzanine financing with Barclays Capital, Morgan Stanley Private Equity has the option to provide mezzanine financing of up to US$55 million resulting in incremental proceeds to ABC of approximately A$24 million as above, or decrease its equity ownership in the joint venture to a minimum of 55% which would result in a reduction in cash proceeds to ABC of approximately A$22 million.3
No Convertible Notes will be Issued
After carefully considering a number of factors including current market conditions and the prevailing ABC share price, the Company has decided not to issue any convertible notes to Morgan Stanley Private Equity.
Reduction of Net Debt
The reduction of ABC’s net debt resulting from this transaction will amount to A$485 million (compared to approximately A$600 million assumed in the announcement on 5 March 2008). This comprises Morgan Stanley Private Equity’s equity investment, the new debt raised by the US joint venture and the transfer of existing liabilities to the US joint venture. In addition, ABC will retain US$20 million of preferred equity in the US joint venture. The proceeds will increase by approximately A$24 million (to A$509 million) if the additional US$55 million of mezzanine debt is raised by the joint venture. They could also decrease by about A$22 million (to A$463 million) if no mezzanine debt is raised and MSPE elects to let ABC increase its stake to 45%.3
ABC has initiated a dialogue with its senior lending banks whose consent will be required prior to the closing of the transaction.
ABC’s net debt balance is expected to be reduced further following the sale of the UK Vouchers business and of ABC’s property portfolios.
ABC has received expressions of interest in relation to its UK Vouchers business and has opened a data room to selected parties. The transaction is expected to close by end of FY08 and to generate a capital profit in excess of A$100 million.
At the time of its 1H FY08 results presentation ABC announced plans for the sale of property and related assets totalling approximately A$250 million. Since then, ABC has received proceeds for the sale of approximately A$40 million of the A$50 million Australia and New Zealand property portfolio and US Property #1 (value of approximately A$50 million) will be transferred to the US business following the successful completion of the joint venture with Morgan Stanley Private Equity. ABC expects to sell the remaining property and related assets of approximately A$150-160 million in FY09.
3 Under this scenario, Morgan Stanley Private Equity would have an option to increase its stake back to 60% within three years.
ABC continues to be in compliance with all the financial covenants under its existing banking facilities.
Partnership for Growth and Returns
This transaction represents an excellent opportunity for ABC to realise significant value for its US business at an attractive price, whilst retaining a material ongoing stake in an important growth market. In addition, the transaction will significantly reduce the Company’s net debt.
Eddy Groves said, “In Morgan Stanley Private Equity we have a strong financial partner who shares our vision for the business and backs the existing management team to deliver it.”
William Davis, CEO of Learning Care Group, Inc., said, “Today marks the next chapter in Learning Care Group’s history as we continue to work towards our vision of operating the highest quality early education and childcare facilities across the United States.”
Steve Trevor, Co-Head of Morgan Stanley Private Equity, said, “We are pleased to reach agreement on this transaction and are excited to partner with ABC to jointly facilitate Learning Care Group’s continued growth.”
Changes to Corporate Structure, Financial Impact on ABC, and Outlook
Changes in Corporate Structure
Following the partial sale of its US business, ABC plans to significantly simplify the Australian operations of the group by unwinding the Regional Management Company (“RMC”) structure that is currently in place.
The removal of the RMC structure will provide the following benefits to ABC:
�� Enables optimal allocation of relief staff between childcare centres (under the RMC structure, it was costly to ABC for the relief staff to work in multiple RMCs)
�� Significantly decreases labour costs through reduced reliance on contract and agency staff
�� Reduces administrative costs due to simplified corporate structure
In order to realise these benefits, ABC expects to incur one-off restructuring costs of approximately A$30 million.
ABC also intends to review all current commercial arrangements with suppliers and other service providers.
Financial Impact on ABC, Revised FY08 Guidance and FY09 Outlook
Whilst the financial impact of the US transaction cannot be calculated precisely until closing, it is expected to result in a book loss in the vicinity of A$280 million including all transaction expenses, based on preliminary estimates. Approximately A$65 million of
this expected book loss is attributable to unfavourable exchange rate movements since the acquisition of the US operations.
The partial sale of the US operations will be dilutive to underlying EPS post completion due primarily to the deconsolidation of EBITDA (which amounted to A$59 million in the last twelve months to December 2007) and a higher average interest rate of approximately 7.5% due to the pay-down of US$ denominated debt. This will be partially offset by interest expense savings resulting from the debt reduction, the coupon on ABC’s preferred equity in the US joint venture and ABC’s share of the post-tax profits of the US joint venture.
Assuming the US transaction and the RMC restructure occur on 30 June 2008, ABC’s reported EPS guidance for FY08 will reduce to A$(0.19) – (0.17) per share due to additional one-off losses of A$0.53 per share (net of taxes), relative to the guidance of A$0.34 – A$0.36 provided on 8 April 2008.
FY08E
EPS (cps)
NPAT (A$m)
Guidance (8 April)
34 – 36
161 – 170
(-) Book Loss on Deconsolidation of US Business
(280)
(-) RMC Restructuring Costs
(30)
(-) One-off Project Cost Write-offs4
(6)
(+) Tax Impact (Effective Tax Rate of 21%)
66
Guidance (Post-MSPE Transaction)
(19) – (17)
(89) – (80)
In addition to non-recurring items such as the loss from deconsolidation and RMC restructuring costs, there are a number of factors which have negatively impacted ABC’s operating performance in Australia and New Zealand in FY08, meaning that the FY08E earnings guidance does not represent the full annualised run-rate of potential earnings. These factors include:
�� Delayed centre acquisitions in 2H FY08 (resulting in lower than expected earnings contribution from these centres)
�� Significant increases in wage and on-costs without corresponding fee increases
�� Temporary costs of agency and contract staff due to staff allocation issues (to be significantly reduced following unwinding of RMC structure)
�� Wages inefficiency due to sub-optimal roster management
�� Bi-annual fee reviews (vs. a single annual fee increase at the start of each fiscal year) and lower fee increases at the beginning of 2H FY08 than originally planned
�� Sub-optimal management of occupancy levels
ABC’s financial performance in FY09 and beyond will now be almost entirely driven by its Australian and New Zealand childcare operations. ABC expects strong underlying centre EBITDA growth by addressing the above factors and a number of other key initiatives.
4 Includes project costs related to potential transactions in the US that ABC had contemplated previously
Key initiatives for ABC’s Australian and New Zealand centres in FY09 include:
�� Like-for-like revenue growth from existing centres
�� Improved occupancy management by optimising waiting lists
�� Increased number of multiple-day enrolments so children can benefit from the strong educational curriculum
�� Maximising existing contracts as a registered training provider
�� Reduced wages inefficiency through improved roster management
�� Lower administrative costs, optimised staff allocation and reduced use of outside staff agencies following RMC restructure
�� Full-year contribution from centres acquired during FY08 (including delayed centre acquisitions added to the portfolio in June 2008)
�� Contribution from non-material acquisitions/new developments during FY09
Additional underlying EBITDA will be generated by the UK Nurseries business and there will be further earnings contribution from ABC’s 40% share of the post-tax profits of the US joint venture.
Board and Senior Management Changes
Changes to Board
Sallyanne Atkinson, ABC’s Chairman since listing in 2001 has advised the Company of her intention to stand down as Chairman with effect from 30 May 2008. She will be replaced by David Ryan, currently a non-executive director of ABC and Chairman of the Audit Committee. Sallyanne will work closely with David over the coming weeks to hand over her responsibilities and ensure a smooth transition.
Sallyanne Atkinson said, “I feel proud to have been able to guide ABC from its listing in 2001 through its growth into the world’s leading private childcare provider. I have always been focused on and energised by the thousands of children and families who have relied on ABC for the highest quality early childhood education and care. After seven years in this role, I now believe that it’s time for a change. I’m pleased to hand over to David to lead the Board through the next chapter in ABC’s development. I have great faith and confidence in the Company’s future.”
Eddy Groves said, “On behalf of the Company, I would like to thank Sallyanne for her years of commitment to ABC. She has made a substantial contribution as founding chairman and will be missed.”
Bill Bessemer, non-executive director and Martin Kemp, executive director have also advised of their intention to stand down as directors of ABC. Bill will retire today and Martin will retire at the next Board meeting on 24 April 2008.
ABC would like to thank Bill and Martin for their contributions as Directors.
ABC is in advanced discussions with two candidates for independent non-executive director positions and is targeting a further one or two non-executive directors. ABC will make announcements in relation to non-executive director appointments in due course.
The new Board will review the Company’s governance structures and processes to ensure that these best represent the interests of shareholders. The Board is also committed to strengthening the Company’s disclosure and market communications.
David Ryan said, “I am delighted to take on the role of Chairman of ABC. I am optimistic about the prospects for the Company given our commitment to reduce leverage, the underlying quality of ABC’s Australian and New Zealand businesses and the trends underpinning the growth of the childcare sector.”
Changes to Senior Management
James Black, who joined ABC as Treasurer in March 2006 and has served as ABC’s Chief Financial Officer (“CFO”) since September 2006, has informed the Company that he will leave for personal reasons. James had previously informed the Company of his intention to retire as CFO, but agreed to stay on to support the business through the last ten months. ABC regrets that James is leaving and would like to thank him for his contribution.
Eddy Groves said, “James has had a 20 year association with ABC, and during that time has made a significant contribution to the Company and been a tremendous support. On behalf of everyone at ABC, I would like to sincerely thank James for his loyalty and hard work and wish him well for the future.”
John Gadsby, currently Group Financial Controller, will serve as interim CFO. John is a member of the Institute of Chartered Accountants in Australia and prior to joining ABC spent 15 years working with Deloitte Touche Tohmatsu, including 6 years as an Audit Partner. ABC has initiated an executive search for a permanent replacement for James.
ABC recently appointed Matthew Horton as General Counsel/Company Secretary. Prior to joining ABC, Matthew held various senior legal and commercial roles at Rio Tinto, most recently as General Manager, Joint Ventures, Rio Tinto Coal Australia. Consistent with the Company’s commitment to improve market communications, ABC has appointed Andrew Barber as Head of Corporate Affairs/Investor Relations. Andrew was previously a Senior Research Analyst at QIC.
Contacts:
Media enquiries
Lisa Keenan Kate Inverarity Scott Emerson
nightingale nightingale Crook Publicity
0409 150 771 0413 163 020 0401 998 181
03 9614 6930 03 9614 6930 07 3221 7155
Analysts
Jonathan Yellowley
[email protected]
Notes to Editors:
ABC Learning
Prior to this announcement, ABC owned and operated some 2,300 childcare centres in Australia, New Zealand, the USA and United Kingdom. ABC commenced its operations in Australia and listed on the Australian Stock Exchange in 2001. The Company has since grown through a combination of organic growth and strategic acquisitions. ABC seeks to elevate standards for the provision of childcare through its centres, with a focus on providing superior amenities and comprehensive training and support to centre staff. This, combined with ongoing curriculum development for children, enables ABC to facilitate and foster best practice in early childhood education and care.
US Business
ABC’s US Business comprises Learning Care Group, Inc, which is headquartered in Novi, Mich. Learning Care Group provides early education and care services to children between the ages of six weeks and 12 years under its umbrella of brands: The Children’s Courtyard, Childtime Learning Centers, La Petite Academy, Montessori Unlimited and Tutor Time Child Care Learning Centers.
Morgan Stanley Private Equity
Morgan Stanley Private Equity, part of Morgan Stanley Investment Management’s Merchant Banking Division, makes private equity and equity-related investments on a global basis. Morgan Stanley Private Equity utilizes Morgan Stanley’s vast resources, including he Firm’s global franchise and relationships with leading corporates, management teams and financial sponsors, to source attractive opportunities for its investment funds. Morgan Stanley’s roots in private equity investing date back to 1985 with the Morgan Stanley Capital Partners private equity funds. To date, Morgan Stanley Private Equity and its predecessor funds have invested nearly $6.5 billion of equity across a broad spectrum of industries.
Mr David Ryan AO
David Ryan has been a non-executive director of ABC since 26 June 2003. His Board roles include Chairman of the Audit Committee and member of the Nomination and Remuneration Committee. He is the non-executive Chairman of Transurban Holdings Limited Group and is a non-executive director of Lend Lease Corporation Limited. He is also the non-executive Chairman of Tooth & Co Limited. He is a member of the Advisory Board of Virgin Management Asia-Pacific Pty Ltd. David has 15 years experience on the boards of public companies and more than 35 years experience in the finance industry and business sectors, including commercial banking, investment banking and operational business management in a range of sectors.