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G8 Education Ltd to acquire 63 childcare centres

Listed childcare and education centre owner and operator G8 Education Ltd (ASX: GEM) has announced the acquisition of 63 centres. It’s a major acquisition for G8 and will see the number of centres under its control increase from 233 to 296. It also means the number of available places within its centres will increase by 4,254 to 21,792 per day.

Pleasingly, despite increased competition in the sector, the acquisitions have been struck at four times earnings before interest and tax (EBIT), which is in line with the company’s stated acquisition plan. The total purchase price for the 63 centres is $104.7 million which will be funded through a mix of existing cash reserves and debt.

G8’s success has led to new entrants looking to snare a share of the profit pie. Affinity Education Group Ltd (ASX: AFJ) entered the sector in late 2013 via an initial public offering (IPO) which could be expected to have put some pressure on G8, for the moment at least it would appear that the fragmented state of the industry has not pushed up acquisition multiples.

However with reports that a third listed player could launch an IPO within the next six months, it’s unlikely this situation can last. More entrants and increased competition is bound to lead to bidding pressures and push up acquisition multiples.

Like the healthcare sector, the education sector has a number of appealing attributes including good margins and growth potential. The recently listed Vocation Ltd (ASX: VET) and the sector-leading Navitas Limited (ASX: NVT) are two other education providers with positive growth potential.

Foolish takeaway

Roll-ups have a mixed record of success. For this reason investors should approach a ‘hot sector’ in the midst of consolidation with caution. That being said, there are many companies that build high quality, sustainable businesses via a roll-up strategy, so they shouldn’t be automatically dismissed.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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