ABS a.b.c. learning centres limited

the exploding bid for abc

  1. 3,457 Posts.
    Adele Ferguson | February 28, 2008

    ABC Learning and its founder Eddy Groves may have been the victims of an elaborate campaign by hedge funds to seize control of the company by short selling the stock at the same time as buying up a $600 million debt instrument, known as exploding convertible notes.

    ABC operates over 2000 child care centres worldwide has recently run into financial trouble. Picture: Amos Aikman
    The notes are so named because they are designed to be converted in the future into ordinary shares on a dollar-value basis, and if the ordinary shares drop in value, the number issued on conversion explodes. The last big company to issue such notes was HIH Insurance in 1999.

    In the case of ABC, there appears to be no limit on how many shares could be issued on conversion, whereas with HIH there was. Hedge funds are believed to have been borrowing stock to short sell Allco as part of a grand plan to push the share price down and trigger margin calls on some of the directors' stock. At the same time, they are believed to have been buying the convertible notes, to trigger an early conversion, to get control of the company. ABC issued the $600 million note last June, around the time the global debt crisis was starting to unfold. It did the issue on a dollar-value basis rather than the conventional "fixed proportion" system.

    The Australian understands that CommSec holds $360 million of the $600 million in convertible notes on issue and could conceivably end up owning a significant amount of stock upon conversion.

    Ironically, CommSec's parent, Commonwealth Bank, has another $250 million exposure to ABC Learning, along with the other three major banks. It is possible but not certain that CommSec may be holding the $100 (issue value) notes on behalf of other investors. Whoever is holding them is getting a coupon of 9 per cent and if they bought them on market at the last trade of $85, they are picking up a running yield of 10.58 per cent.

    On Tuesday, ABC's ordinary shares dived 43 per cent, leaving the company with a market capitalisation of just over $1 billion. At one point during the day, the market capitalisation was $550 million.

    If the market cap falls to $500 million and the notes are converted, the ex-noteholders will own more than half of the company. For existing holders, including ABC founder Eddy Groves, the earnings per share of the company will fall more than 40 per cent.

    The talk going around the market yesterday was that hedge funds, which generally use debt instruments to penetrate a company, decided to target ABC by short selling the stock to a point where margin calls were made on the company directors, and at the same time bought up some convertible notes.

    The share price fall has put pressure on the company, putting it close to breaching debt covenants and forcing the company to halt its share trade so that it could organise to sell some assets.

    Like most convertible notes, ABC notes have a fixed first date for conversion, but that can be brought forward if the company changes significantly. One of the triggers of the convertible notes is the sale of core assets.

    Body: There is little doubt hedge funds were out in force on Tuesday. Almost 157 million shares, nearly a third of those on issue, traded. At one stage ABC's value was down 70 per cent.

    Mr Groves joins a growing list of directors who have fallen victim to margin calls including David Coe and Gordon Fell at Allco Finance, former Centro Properties CEO Andrew Scott, and MFS founders Michael King and Phil Adams. "There is skullduggery going on in the market and this sort of activity shouldn't be allowed to go on," said a broker.

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