Childcare operator and market darling G8 Education has extended its Australian network after buying 63 centres for $104.7 million, in a sign that increasing corporate activity in the sector shows no sign of slowing.
The expansion means places for an additional 4254 children across its centres, the Brisbane-based company said. Its share price has climbed 101 per cent over the past year thanks in part to its strategy of growth by acquisitions. G8’s performance has also sparked a rush of corporate activity in the childcare sector, an industry in which investors were famously burnt by the collapse of Eddy Groves’ ABC Learning in 2008.
The 57-centre strong Affinity Education followed G8 Education onto the Australian Securities Exchange with a public listing in December. Its shares have climbed 24 per cent since then. The market is set to have a third investment option, with the news revealed in Street Talk that float hopeful Stirling Early Education will look to raise $200 million before June for a planned roll-out of childcare centres.
The acquisition had boosted G8 Education shares in trading by a further 5.8 per cent to $3.48 at 11:24am AEDT.
In a statement to the market, G8 said the deal would be funded from existing cash reserves and debt, and is expected to be settled on April 30.
Managing director Chris Scott said the centres’ acquisition would contribute $26.6 million in annualised earnings before interest and tax. “The centres are expected to contribute to EBIT immediately upon settlement and continues G8 Education’s expansion in a way that is earnings per share accretive,” Mr Scott said in a statement.
“This transaction will increase the numbers of places by 4254 and takes the total number of places in the Australian portfolio to 21,792 per day.”
G8 Education chairman chairman Jenny Hutson told The Australian Financial Review last week the sector has strong growth fundamentals because many families see childcare as an essential service.
The sector also benefits from government subsidy and policies designed to encourage women back into the workforce after having children.
The corporate players are embarking on acquisitions of independently owned centres. This strategy is helped by the high level of fragmentation in the industry.
Affinity Education chief executive Justin Laboo said that of the 6200 centres in Australia, more than 80 per cent are run by single-centre owners.
Both Affinity and G8 have said they will ensure their acquisitions do not cost more than four times EBIT.
Analysts have said they will watch this price threshold closely to ensure the market does not return to the inflated values that brought down ABC Learning, which paid too much for centres and racked up mountains of debt. In the year before its collapse ABC Learning owed $2.2 billion.
Ms Hutson said the level of fragmentation will be a buffer against price inflation caused by competition among the new corporate players.
“We’ve watched with interest the emergence of Affinity and its listing,” Ms Hutson said. “We think the sector is big enough for our aspirations to be fulfilled whilst other parties emerge.”
