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ABC Learning Centres Ltd. tumbled to the lowest in 6 1/2 years in Sydney trading on concern the sale of a 60 percent stake in its U.S. childcare centers to Morgan Stanley for A$750 million ($700 million) will curb earnings growth.
The shares plunged 39 cents, or 18 percent, to A$1.75 on the Australian Stock Exchange, reversing an earlier 29 percent gain. ABC's stock fell 43 percent when last traded on Feb. 26 as a slump in earnings raised concerns it will struggle to repay debt. The company resumed trading today after it yesterday sold the stake in a deal that values the U.S. business at $775 million.
The deal means ABC Learning will surrender financial control of more than 40 percent of its roughly 2,300 childcare centers globally -- having almost quadrupled its size in 2 1/2 years. ABC Learning will use the cash to cut existing debt after last week saying it hadn't breached any financial covenants. Morgan Stanley's private equity unit will buy the assets and also agreed to buy notes convertible into 10 percent of ABC Learning's stock. The deal is expected to be completed in April.
"This is not good for shareholders,'' said Roger Montgomery, who manages about A$200 million at Sydney-based Clime Asset Management. "Sure they've paid down debt, but there's now less revenue coming in. About 10 percent of the company has been taken away from you.''
ABC Learning today defended the deal, denying it was a knee- jerk reaction to last week's share price plunge. The sale was ``a response to an excellent opportunity,'' said Lisa Keenan, a Melbourne-based spokeswoman for the company, by telephone. "This was a legitimate approach that allows the company to crystallize value while retaining significant upside in a growth market.''
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"I don't understand why they needed to sell when they weren't in breach of any banking covenants,'' said Jenny Owen, a Sydney- based analyst at Citigroup who has a "hold'' rating on the stock.
"It reduces debt within the group, which is a good thing, but it also sells away some of their upside.''
ABC Learning operates 1,000 centers across the U.S., more than 1,200 in Australia and New Zealand and 112 nurseries in the U.K., having spent about $1.06 billion expanding in those four countries since its first U.S. purchase in November 2005.
- reprinted from Bloomberg