G8 Education Ltd (ASX:GEM) has proposed to make a takeover bid for Affinity Education Group Ltd (ASX:AFJ) at $0.70 per share.
GEM requested a trading halt just before market open in order to make the announcement. G8 Education proposes to offer one fully paid ordinary share for every 4.61 fully paid shares in Affinity Education, which values the education provider at $0.70 cents per share of $162 million. Even though AFJ gains significantly today, the offer price is still well below AFJ’s average price earlier this year. It appears that G8 Education saw this opportunity to buy an oversold company at a fairly reasonable price.
GEM lost around 2% at 11am (AEST) while AFJ gained 26% to match the offer price.
Both companies have recently been sold off due to negative market sentiment. Affinity Education has currently 161 centres with a 77% occupancy rate, up from 72% in January. The company informed shareholders and the ASX yesterday that it expects FY 15 EBITDA to be in the range of $27-$32m, excluding one-off acquisition and integration costs.
GEM’s proposed acquisition values AFJ at 5-6 times EBITDA and could result in mixed responses from shareholders. Despite being fundamentally strong and on track to meet guidance, shareholders have increasingly reduced exposure amid fears that GEM’s aggressive acquisition strategy does not pay off in the long-term. However, the board has assured several times that “acquisition opportunities remain attractive” and the “operational model effective”, so Jennifer Hutson, Chairperson at G8 Education. G8 Education pays a quarterly dividend, which yields more than 7% at the current price.
Whilst shareholders remain uncertain about GEM’s growth strategies, it is clear that the company follows a different strategy than some of its competitors or ABC Learning, which collapsed during the GFC. GEM aims to buy cheap childcare centres with a healthy balance sheet in good locations. Unless we see a collapse in the childcare system or the government interferes with regulations and restrictions, G8 Education’s long-term outlook appears generally favourable.
Author: Simon Herrmann
Jul 03, 2015
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.