Tuesday, February 26, 2008

ABC Learning and the privatisation of early childhood

In the March 1996 Federal election, National Party candidate Larry Anthony made Australian history as the first member of a three-generational Federal parliamentary family.

Larry’s dad Doug had been a leader of the Nationals, and hence deputy Prime Minister in a federal coalition, and Doug’s dad Lawrence had also had a run as a federal pollie.

John Howard looked after young Larry with a minor portfolio, that of Children and Youth Affairs.
When Larry lost his seat in the 2004 elections, Eddie and Le Neve Groves snapped him up for ABC Learning, the fledgling company they had listed on the Australian Stock Exchange in 2001.

A book could be written about the way politicians are recycled through corporate businesses once they are voted out of office or retire. Chris Schacht going onto the board of Marathon is a notorious local example.

ABC Learning had been enabled to list on the ASX when the federal government opened the way for private enterprise to operate child care centres in 1991. Legislation created by Anthony provided subsidies to families for child care that were passed directly to the centres they chose. Childcare fees went through the roof (currently between $60 and $100 per day, or a rise of over 70 per cent on 2002 figures). Thanks to Anthony, nearly 50 per cent of ABC Learning’s revenue is derived from these government subsidies[1]. No wonder ABC was keen to recruit Anthony. He had provided a government guarantee on their profitability and had the connections to continue to influence government policy in this area.

ABC Learning has continued to grow. Its growth has been aggressive and it has entered the US and UK markets. It is the world’s largest listed private provider of child care.

In the course of its growth, ABC Learning has proven to be a bit of a dodgy operator.

Staff are on AWAs (unAustralian Worklpace Agreements introduced by the former reactionary Howard Government) with low pay and conditions. There are reports that there are allocated amounts of toys per centre that are only renewed on an annual basis; of toilet paper allocations not being enough to meet need; of a reduction of sandwich provisions from three per child to one per child; and of poor health and safety provisions.

Indeed, Groves took the Victorian government to court when it tried to enforce inspections of ABC Learning child care centres. Groves tried to argue that the government did not have the authority to carry out inspections and that directors of the company were not legally liable for the children in the care of their centres. He argued that responsibility for children lay not with the company, but with its staff. The Victorian Supreme Court ruled that ABC Learning was indeed criminally liable for the children.

But the bigger they get, the harder they fall.

And that is what happened on February 26, 2008.

Over the course of 24 hours, 156,096,660 shares were traded, sustaining a massive 42.78 per cent loss in value.

(Note that there are two graphs here showing the decline in share prices which started in August of last year, and culminated in the further dramatic drop at the end of February this year; and the bottom graph which shows the volume of shares traded. The huge volume traded on February 26 is represented by the black vertical line at the end of the graph; shares traded since August 2007, by contrast, are almost too small to be noticed on this scale.)

Among those disposing of huge quantities of shares were the directors themselves.

It appears that a combination of factors were at work.

The company’s rapid expansion program was almost solely funded by loans, by debt, but the cash flow from the centres owned by ABC Learning has been insufficient to service the cost of the loans.

To add to the problem, most of the loans taken out by directors to finance the expansion look like having been margin loans, a high risk and poorly regulated form of loan which does not require disclosure to shareholders by the directors.

With a margin loan, the borrower has to not only repay the loan and interest, but has also to ensure that the market value of the underlying asset is maintained to an agreed level. If it drops, then the borrower gets a “margin call”, an order to effectively increase the value of the assets securing the loan.

Selling all or part of one’s share portfolio to raise cash may turn out to be one of the few options open to the borrower.

It appears that several of the directors in ABC Learning, whose shares last year were trading at $7 to $8 dollars, received margin calls prompting their sale of tens of millions of shares on February 26.

However, it is also likely that aggressive rumour mongering by international hedge funds may have played its part, causing an initial loss in ABC Learning’s share value, followed by share lending (in which said hedge funds pay a fee to superannuation companies to borrow their ABC Learning shares for a specified short period) and short selling (the hedge funds then sell the shares to force a drop in prices then buy them back at a profit when the price hits as low as its likely to go).

These are the scenarios being painted in the financial pages and in stock trading chat rooms.

The Australian (Feb 27, 2008, Short sellers teach ABC a hard lesson) reported that “A shell-shocked Eddy Groves has lashed out at hedge funds, claiming the mass market shorting of his childcare empire yesterday was ‘sad for Australia’….”

However, it went on to add that Groves “could not put to rest the rumours about the director’s level of margin calls”.

There were howls of outrage in the yuppiedom of chat rooms.

“The practice of superannuation funds Custodians lending shares that 9 times out of ten are to be shorted is not only deceptive it is DIABOLICAL. The shareholder is being CUCKOLDED,” wrote Michaelirish on the HotCopper forum.

Over on Aussie Stock Forums, Gekko raised the spectre of insider trading, very topically since the Australian had reported only days before that the illegal practice was “rife on the ASX”, saying: “I would love to know how these hedge funds knew the directors/founders were leveraged up on margin loans. From what been (sic) spoken, may os funds colluded to short sell and drag down …ABS knowing that founders would have margin calls is falls were large enough. But how did they know they were leveraged up?”

With the future of the company uncertain, it is time to ask why the federal government (National-Liberal Coalition) allowed and (Labor) continues to allow this McDonaldisation of childcare.

Children are not commodities and should not be placed into positions of vulnerability when their physical and emotional safety and early learning is allowed to be the plaything of a company that operates for profit.

When the British investment bank Northern Rock collapsed through exposure to the US sub-prime crisis, the British Government was eventually forced to step in and nationalise it.

If Rudd wants an education revolution, he should tell Eddie Groves that enough is enough, that children’s futures cannot be guaranteed through the volatility of the stock market, and certainly should not be subject to the predations of imperialist finance capital via the hedge funds, and bring all childcare provision back under direct government ownership and control.

[1] John Durie, The Australian, February 27, 2008: “ABC has grown quickly with the help of federal government subsidies to kindergartens that accounted for some $207 million of its $517 million in Australian revenues in the latest half.”


Mike said...

Adele Ferguson in the Australian (28/2/08) (here: http://www.theaustralian.news.com.au/story/0,25197,23287234-643,00.html) reveals that ABC issued $600 million in exploding convertible notes last year. These are options for shares that are not, as is normal practice, limited to a certain number of shares, but rather options for the purchase of $600 million worth of shares at current market prices. In other words, the cheaper the market price of the shares becomes, the more shares can be bought with the same amount of money. That is, if a share costs $6, then 100 million company shares can be bought through the exercise of the option embedded in the notes; if the price can be forced down to $1 each, then 600 million can be bought. If hedge funds have bought significant volumes of exploding convertible notes, and can short sell shares and/or force margin calls so that directors have to offload huge volumes of shares, then they can expercise their options through the ECNs to capture control of the company. All of these parasitic, non-productive practices are typical of the highest stage of capitalism in which finance itself is a commodity with its largest and most aggressive concentrations being located in the major imperialist powers, and the US in particular.

The papers also reveal today that the 30% tax rebate on child care provided by the federal government directly into the pockets of private child care providers is being lifted to 50% under the new Rudd Labor government.

Why? The provision of free and universally available child care should be a responsibility of the government as a service to the community; rather than the current practice of lining the pockets of Eddie Groves and his wife and mates with a guaranteed, and increased, flow of tax-payer dollars.

Mike said...

Like Icarus who flew too close to the sun, Eddie Groves has seen the wax wings of his $300 million ABC Learning empire melt away through overexposure to the heat of intensely speculative money-making. He has now been forced to sell every single share in the company, as has his wife Le Neve. Singapore sovereign wealth fund Temasek Holdings now owns about 14% of company shares, as does US investment bank Lazard Asset Management. While all the attention is on Eddie as an individual, the ABC Learning scandal shows the vulnerability of Australia's weak national bourgeois elements to the manipulations of imperialist finance capital. If we are ever to free ourselves from the many-skeined net of imperialist depenency and entrapment, it will be through a movement led by the working class.