February 26, 2008 / 1:12 AM / 11 years ago

UPDATE 2-Australia's ABC Learning shares tumble on debt fears

(Recasts, adds CEO and fund manager comment)

By Richard Pullin

SYDNEY, Feb 26 (Reuters) - Shares in ABC Learning Centres Ltd ABS.AX, Australia’s top private childcare operator, fell nearly 70 percent, hit by a weaker-than-expected profit, high debt and talk its founder had been forced to sell shares.

A third of the stock changed hands, with A$759 million ($702 million) wiped off its value, after traders said rumours swept the market of selling by hedge funds, while the company issued two statements denying it was in breach of loan covenants.

ABC Learning, which operates 2,200 childcare centres, mainly in Australia and the United States, after a rapid debt-funded expansion, is the latest Australian company to be dumped by a market averse to high levels of debt.

Asset manager Allco Finance (AFG.AX), which is selling assets to meet debt repayments, and property group Centro CNP.AX, which is under heavy pressure to sell assets, have both seen their shares hammered in recent months.

“Any company that’s as highly geared as ABC causes concern for the market. That’s the mood of the market at the moment — sell now and work it out later,” said Richard Herring, director at Burrell & Co. “Whether or not that’s justified, only time will tell. It does look overdone at this stage.”

ABC’s stock partly recovered to close down 43 percent at A$2.14, but has still lost more than two-thirds of its value since last May, when Singapore state investment firm Temasek Holdings [TEM.UL] bought a 12 percent stake at A$7.30 a share.

Founder and chief executive Eddy Groves, who owns 37 million shares, or nearly 8 percent of ABC, told reporters on a phone briefing the company was in a strong position, but refused to say if he had faced a margin call on his shares.

“I won’t comment on my personal situation,” he said.

“I think there’s been some mischief within the stock. My personal situation won’t affect the company as the company will continue to trade.”

Any sale of shares would have to be reported to the market within 48 hours under stock market rules.

Groves defended the company’s half-year result, which analysts said was difficult to understand and below forecasts.

“For me really right now it’s a bit surreal,” Groves said. “It’s just quite extraordinary what fear can do and what this momentum can do.”

He said he had been advised that hedge funds were selling the stock, but had no direct knowledge of any sales.

ABC late on Monday reported a 42 percent fall in first-half profit to A$37.1 million ($34.3 million), but reaffirmed its forecast of 15 percent earnings growth for the full year, saying its U.S. earnings would be skewed to the second half.

“The stock is now out of the comfort zone and should be considered speculative,” Macquarie Bank analyst Mark Carew said in a research note, adding that the use of debt finance to expand in the U.S. had substantially increased ABC’s financial risk.

ABC said it was well within the covenants on its A$1.4 billion three-year bank facility. The covenants related to shareholders’ funds, funding ratios and gearing ratios, and did not depend on market capitalisation or the company’s share price.

ABC also has a A$600 million bond with a nine-year term. ($1=A$1.08) (Additional reporting by Geraldine Chua; Editing by Ian Geoghegan)

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