After requesting a trading halt yesterday, shares of Affinity Education Group Ltd (ASX: AFJ) are going to remain dormant until 17 March 2015 following the announcement of a capital raising and acquisition this morning.
Affinity said it will raise $75 million through a $52 million institutional entitlement offer and $23 million retail entitlement offer. The retail offer will be a fully underwritten pro-rata accelerated renounceable entitlement offer.
If that sounds like financial gobbledygook to you, don't worry, I've been doing this for years and it can still confuse me!
Put simply it means if you own Affinity shares on 17 March 2015, you'll have the right to participate in the offer of new shares, according to your proportionate (i.e. pro-rata) holding in the company. However you're not obliged to participate (your rights are "renounceable"), but know this, if you don't participate someone (in this case it's CBA Equities and Canaccord Genuity) will buy those rights anyway (i.e. they're "underwritten"). So your holding will be diluted but you'll get something in return.
Offer details
The record date is 17 March 2015 and eligible shareholders will be entitled to eight new shares for every 21 they currently hold. The offer price will be $1.18 per share (roughly a 12% discount to the last traded price on March 11.
Directors will be taking part in the offer, to the extent their financial circumstances permit.
Where's the cash going?
Affinity says it'll spend $24 million on its most recent acquisition of nine premium child care centres – eight in New South Wales and one in Brisbane. The new acquisitions – and 24 of the 27 recently acquired centres – will be settled by the end of the first half of its 2015 financial year.
Unfortunately, Affinity says the entitlement offer and new acquisition will result in $5.6 million of costs.
With the remaining $45.4 million, the company intends to strengthen its balance sheet by paying down debt (a good idea in this Fool's opinion). This will give it the flexibility to undertake further acquisitions, if and when appropriate.
The following graph sums it up nicely…
Source: Affinity Education Group, capital raising and acquisition presentation.
Should you take part?
Affinity Education could be the next G8 Education Ltd (ASX: GEM) if it manages its debt prudently, acquires new centres for good prices and keeps occupancy rates above 80%. Indeed management has a goal of increasing its portfolio by between 20% and 25% per year, which it says will enable it to build scale and drive improved returns. Whilst such an aggressive roll-up strategy can be fraught with risk – certainly it's not a risk-free investment by any means – G8 Education has proved it can work.
If I owned shares, I'd take up the offer.
