more negativism from fairfax on abc learning

From the Sydney Morning Herald:

ABC deal fails make the grade

* Danny John
* June 12, 2008

THE future of the debt-laden childcare operator ABC Learning Centres appears to lie in the hands of its banks, a new private equity investor and its few remaining major shareholders following its latest desperate cash-raising stock issue, analysts have concluded.

Instead of taking the financial pressure off the company, ABC's surprise move to place 13 per cent of its equity with Morgan Stanley has highlighted its debt repayment problems and the lack of earnings coming through its business, say two highly critical broker reports.

The price weakness of the stock placement - carried out at 15 per cent discount to a share price that has since fallen 18c in two days - and the fact that it raised just $82 million as a result - has only added to the market's concerns about the company, according to Citi and Macquarie Research.

With its founders and joint chief executives, Eddy Groves and his wife Le Neve, having been forced to sell their shareholdings because of margin calls, ABC is effectively dependent on the ongoing support of Morgan Stanley and two fund managers, Singapore-based Temasek and Lazard Asset Management.

Lazard took up another 2.1 per cent in the placement, which was priced at $1.15 a share compared to Friday's close of $1.35. But Temasek was notable by its absence in Monday's move. It is sitting on major losses on its existing investment, having bought 55 million shares last July at $7.30 a share.

The latest cash-raising issue, aimed at paying off part of its debt, failed to impress the market, which yesterday marked ABC's stock down to $1.17 - just 2c above the placement price.

In a note to its clients, Citi said the placement raised a "further red flag" over the stock and underlined a belief that the pressure on its earnings from its underperforming Australian, New Zealand, US and UK businesses was continuing.

Citi also raised the prospect of the business being privatised if ABC's major shareholders think current concerns about the business were to persist.

Macquarie Research analyst Mark Carew was just as critical. "If [the company] wanted to dispel the market suspicion that it is short on cash then this placement at a steep discount rather than a rights issue has put fuel on the fire," he said.

Describing an accompanying statement on its current trading position as "vague", Mr Carew added: "The transparency of ABC's earnings remains poor and one could argue the business is being run to satisfy the creditors at the expense of equity holders."