See text below.
EXCERPTS
As the facts come out it is clear that the ABC Learning affair is one of worst market manipulation games Australia has seen. However, parents sending children to ABC centres and ABC and staff should not be concerned, at least for the medium term. Unlike, say, Centro this was a crisis generated outside the company and in the shareholder base. The company itself had no immediate funding difficulties.
At the base of the game there is no doubt that the hedge funds believed that there were deep undisclosed problems at ABC Learning and this inspired their action.
The hedge funds borrowed vast amounts of stock from index and superannuation fund managers and sold it on the market in one of the biggest and most successful shorting operations Australia has ever seen.
The delinquent index and superannuation fund managers clearly acted against the interests of their clients. Hopefully Australian regulators will now stamp out this practice and a court case can be mustered to make the index funds and superannuation fund managers pay damages. They either knew that they were acting against the interests of their clients or should have known.
According to Adele Ferguson in The Australian, the hedge funds then bought up convertible notes which had crazy clauses in them which gave them conversion rights that delivered virtual control of the company if the shares fell far enough. Why the ABC board would ever agree to terms like this is beyond comprehension.
Then of course, Eddy Groves and his wife had margin arrangements which caused their shares to be sold on the stock fell far enough. The Groves had lots of founder shares but kept buying extra stock including one million shares at $7 last year. Clearly when directors have debt against their shares, the terms should be revealed.
As we pointed out in Business Spectator I think it is possible that the ABC group will be broken up. But the market value of the centres may be less than book value in the current environment. Child care is a highly regulated industry and requires great skill to manage it. The ABC board needs to work very hard to make sure they have people to manage the operation if the Groves become too distraught.
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- reprinted from the Business Spectator