Eddy all fall down go boom

Today shares in ABC Learning (Australia’s biggest operator of child-care centres) took a dive. Reason: the company is loaded with debt, and at the moment any company with lots of debt is suddenly on the nose and the shares are sold down.

Only a few months ago, ABC Learning was one of the stars, could do no wrong, onward and upward forever.

A few observations:

- Hedge Funds seem to be indulging in blatant market manipulation by finding companies where the management have a lot of shares secured against borrowed money (”on margin”), then by clever buying and selling they can trigger a “margin call” resulting in a forced sale by said management. The forced sale drives the price down further, the Hedge Fund can buy at the lower price and make a tidy profit – especially if using short selling. Sooner or later this kind of market manipulation will have to be examined and probably outlawed, because not all market players are equal. Those who have a lot of money can screw those who don’t, and those in the know on the strategy win while the little guys lose. Once this was called insider trading, now there is nobody on the inside, merely somebody on the outside who can change the market dynamic so radically they might as well be on the inside.

- Large amounts of debt have always carried a higher risk. A benign environment has meant that companies and individuals have got away with it for so long that when the environment changes they are like rabbits in the headlights: confused and wondering where it all went wrong, just before being smashed into little bits. That said, though, careful use of debt has had a useful place for a long time, and will continue to do so. There seems to be a degree of market overreaction at the moment.

- (and finally) I’ve always been a bit suspicious of ABC Learning. They have grown very rapidly in a fairly capital intensive business (all that real estate… unless its leased) and (probably worse) they have a very high dependence on the government subsidies for child care. For a big owner of ABC Learning shares, a change in government policy is all that stands between a nice dividend, and wondering how to put bread on the table. That level of dependence on government largesse has always left me feeling a bit underwhelmed.

Who knows where the credit crunch will take us, and how many more companies will suffer terrible falls in share prices. And who knows how many companies will be so badly hit that they end up being broken up and sold off at bargain prices, where the shareholders get next to nothing. Such is the way of market upsets. All a good argument for having a diversified portfolio of carefully run companies.

4 Comments

I have to admit.. I had a certain delicious feeling of schadenfreude as this story evolved today.. I’ve never liked Eddy Groves and I detest the whole commercialisation of childcare that he’s led.

I used to be on the board of a Community based Childrens centre that paid NO RENT on a Govt provided property and even they had trouble keeping the budget in the black from year to year.. I fail to see how Eddy can make a profitable business out of such small margins.. the worst is yet to come for ABC I think.

Dunc.

Comment by Duncan Margetts | February 26th, 2008 11:50 pm | Permalink

Trading halt asked for by company today AFTER two directors offloaded a huge amount of shares.. that stinks..

Dunc.

Comment by Duncan Margetts | February 27th, 2008 10:26 am | Permalink

Wow.. a big dump of shares by a director just before the profit announcement.. that stinks to high heaven:

http://www.abc.net.au/news/stories/2008/02/27/2174104.htm?section=justin

DUnc.

Comment by Duncan Margetts | February 27th, 2008 2:33 pm | Permalink

I agree with Dunc. I too used to be on the management committee of a community childcare centre and we were always struggling for each dollar. It never sat well with me that he was supposedly making such huge profits from the need of desperate parents (did you see the news in today’s age that the average household income is no longer enough to cover the average house price?).

Whilst I couldn’t give a flying fart to Eddie, I do worry about the families who may be struggling to find childcare…

Comment by MillyMoo | February 29th, 2008 9:22 am | Permalink

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