So it would seem the only way to get out of the current impasse where debt exceeds ambition and assets, not to mention profits and cash flow, is to find someone willing or game enough to appear as a ‘white knight’.
It is of course a standard tactic in every takeover battle but for the embattled duo, ABC Learning Centres and Allco Finance Group (See Below), it smacks of one last desperate throw of the dice before the axe swings
Who knows, it may work if the suggested deals turn out to be real and are transacted.
Take ABC Learning. It went into a trading halt yesterday morning amid suggestions there could be a deal in the offing.
"A.B.C. Learning Centres Limited (A.B.C.) requests a trading halt of its securities from the ASX as a result of indications of interests that the company has received in relation to part of its business.
"The company expects the discussions on this matter may take longer than the two business days trading halt period. If this occurs the company will request a voluntary suspension for a short period," ABC told the ASX.
The suspension did have the very favourable impact of halting the rout in the shares: with a line of 10 million shares poised to be sold through the market at $2.14 amid speculation it was part of the shares owned by founder Eddie Groves and his wife.
Mr Groves, and wife, Le Neve Groves, were forced to dump shares equivalent to 5.6% of the company’s listed shares to satisfy margin calls on loans secured against the shares. They were forced to sell more than half their holding in the company, or more than 19 million shares, at prices as low as $1.83 a share. That cut their stake from 7.9% to just over 4%.
Yesterday morning, the company revealed that director, David Ryan, was forced to sell his entire stake of 249,000 shares while fellow board member, Martin Kemp, was forced to dump a massive 7.6 million shares, leaving with 2.76 million of the struggling company’s stock.
But then just after 4.30 pm yesterday, another disclosure from ABC Learning
ABC Learning said that almost all the shares owned by its board of directors are subject to further margin calls, including the entire stake of company founder Eddy Groves.
That means that if the trading suspension is lifted on ABC shares, the board can expect to see its collective ownership of ABC Learning wiped out almost entirely.
The only possible hope for founder, Mr Groves, is the suggested deal that could see some part of the business sold. It has bought another 24 hours breathing space.
ABC directors were Tuesday forced to dump more than 26 million shares to meet margin calls. In the announcement late yesterday the company said that just over 21 million of the 21.86 million shares beneficially held by the directors are ”held pursuant to margin lending arrangements".
If the trading suspension is lifted, the news is almost certain to see traders short the stock to trigger margin calls, which would eliminate Mr Groves as a shareholder from the company he founded.
So yesterday morning’s trading halt, asked for because of “as a result of indications of interest" in relation to "part of its business", is now the last defence for the company and its founder. Either the deal gets done and more breathing space is won, or it fails and the end is at hand.
But it is not clear from the company announcement whether the company is now considering a fire sale of assets to sell down debt. ABC said talks on the issue may take more than two days.
The shares closed Tuesday at their lowest point in five years, down 43% at $2.14, after recovering from lows of $1.15 in trading.
Investors sold Tuesday after looking at a very poor interim report with lower earnings (of very low quality) and an explosion in debt and finance and interest costs.
As well fears that a downturn in the US economy would cause revenues fall at ABC’s 1000 US centres, and in turn this would reduce the carrying value of the centres, thereby triggering a breach of the company’s covenants on $1.2 billion worth of loans used to fund their purchase. ABC has total debt of $1.8 billion. Short sellers and other speculators sold stock and then tried to buy back in.
Yesterday’s suspension would have left quite a few traders short and unless the suspension is lifted, there could be quite a few people with expensive short positions on Friday.
But any news that could give the company breathing space would be welcome, especially with the damage done to directors’ personal wealth.
Now ABC did not identify the interested party or parties or which part of its business had attracted them but the best bet from brokers was that it could be Singapore government-based investment company Temasek Holdings. It picked up 12% of ABC last year at $7.30 each. That had peaked around $8.30 in late 2006.
Others speculated it could be Macquarie Group bottom fishing for cheap assets under pressure, but then Macquarie was also mentioned as a possible part savior of an even bigger mess, Allco Finance Group.
CEO Eddie Groves Tuesday reassured shareholders that the company had not yet breached the borrowing covenants because shareholder funds exceeded $2 billion.
But total assets consist mostly of $3 billion of intangible assets, which is mostly goodwill on all those centres bought in Australia, the US and Europe. The company has around $900 million of other assets, while debt totals $1.8 billion. Shareholder funds are $2.2 billion, so there is something very ‘elastic;’ in those accounts with intangible assets such an important part of the balance sheet.
If a deal emerges, standby for a rush to the exits.
