Childcare bidding

Childcare bidding

Further to our post on G8 Education’s multicurrency debt programme, it’s worth noting that their newly listed competitor Affinity (ASX: AFJ) also made a sizeable increase in its debt facility the week before.

Affinity has announced plans to increase its debt facility from $20 million to $100 million in a clear signal to the market that it plans to make further acquisitions.

Affinity is set to own 119 child care centres around Australia with the company recently raising equity to purchase 51 centres on 5.2 times anticipated Earnings Before Interest and Tax (EBIT). This was comfortably above the multiple that the industry considers as reasonably attractive for the acquirer, which is 4 times EBIT.

Let’s think about the dynamic that another aggressive acquirer brings to the market. Put yourself in the position of an independent child care operator that has spent a good portion of their life building the value of their core asset. Many of these operators would have a view to realise an attractive price on this investment to support their next endeavour or possibly retirement.

If many operators become aware that GEM, AFJ and others have sizeable capital at their disposal and are jumping over each other to acquire centres, where do you think the bargaining power will shift? How likely will the players be able to continue making acquisitions on 4 times EBIT as was the case until early 2014?

We were attracted to this rollup opportunity until the competitors began exhibiting more aggressive bidding behaviour. Given the returns on future incremental capital deployed will be lower or will become riskier (more debt will be needed to achieve comparable returns on equity), we have exited our position in the Montgomery [Private] Fund.