ABC’s Eddy Groves fights to regain market confidence

Eddy Groves, founder and chief executive of child care giant ABC Learning Centres, has had his wings clipped.

Last night, ABC finally completed a deal to sell a 60% stake in its US operations to Morgan Stanley Private Equity. The completed deal values the US operation at $US700 million, although this is $US75 million less than when the deal was first announced on 5 March. 

“I’ve got a few holes in my pants, but I’ve still got my pants on,” said Groves.

The proceeds of the sale will be used to reduce ABC’s debt by $485 million, which will appease the company’s institutional investors, who have been agitating for management to de-leverage and de-risk the business.

Groves’s aggressive expansion strategy, which took ABC to the United States and Britain, has been scaled back significantly. On top of the sale of 60% of its US business, ABC will also sell part of its British business. Rather than spending time overseas growing the business, Groves will now concentrate on the “micro management” of the Australian operations, specifically targeting fee increases and cost cutting.

The current management structure – under which individual ABC centres are managed by separate regional management companies – will be unwound, with the parent companies taking direct control of individual centres. “The Australian and New Zealand business is very profitable and very solid,” Groves said last night.

But the costs of unwinding the regional model will affect ABC’s 2007-08 result. ABC is now forecasting a loss of $80 million to $89 million for the period, compared with the $161 million to $170 million profit it predicted earlier this month.

ABC also announced sweeping changes to its management structure. Chairman Sallyanne Atkinson and directors Bill Bessemer and Martin Kemp have been dumped, with respected company director David Ryan (who is chairman of Transurban and a director of Lend Lease) appointed as chairman. ABC has also replaced its chief financial officer and appointed an investor relations manager for the first time in its history.

Groves says he remains committed to ABC, despite being forced to sell almost all his personal shares in the company after a series of margin calls in February. While conceding that the last two months had been difficult, Groves says he will continue to fight to regain the confidence of the market.