Following some unusual events, including an announcement by the Takeovers Panel, last month, childcare centre owner and operator G8 Education Ltd (ASX: GEM) made three more promising announcements to the ASX today.
Chairman appointment
Following the departure of Jenny Hutson, G8 announced the appointment of Mark Graham Johnson as her successor. Mr Johnson appears to be a highly credentialed board member with current directorships on the boards of Westfield Corp Ltd (ASX: WFD), HSBC Bank Australia and Chairman of MH Premium Farms Holdings Pty Ltd, among others. Prior to his board career, he was CEO and senior partner of PricewaterhouseCoopers (PwC).
"I have a passionate interest in and commitment to education, and I am excited to be offered the role of Chairman at G8 Education," Mr Johnson said. "It is my intention to provide strong, independent leadership of the Board whose focus is on overseeing quality educational outcomes for more than 36,000 children as well as protecting and enhancing ongoing value for our shareholders."
Change of Auditor
G8 also said it'll change its auditor, subject to regulatory and shareholder approval, at the end of this financial year. Current auditor, HLB Mann Judd will be replaced by one of the three top-tier firms (Ernst & Young, KPMG or Deloitte), with PwC providing financial and other professional services.
Many shareholders and investors find comfort in knowing the auditor of their company's financial statements is a highly credentialed and reputable top-tier firm.
Acquisition of 13 centres
With all previously announced acquisitions scheduled to be settled by 27 November 2015, G8 today said it has entered into contractual arrangements to buy another 13 centres from different vendors. Subject to some conditions, G8 will acquire the 13 centres by paying $29.7 million out of cash reserves.
The acquisition is expected to contribute to G8's earnings before interest and tax (EBIT) immediately upon settlement. The purchase price represents a valuation of roughly 4.1x anticipated EBIT in the 12 months post settlement. The acquisitions will increase G8's number of daily places on offer by 1,000 to 36,125.
Buy, Hold or Sell
G8 Education relies on a growth-by-acquisition strategy whereby it purchases groups of individual businesses from private owners at cheap valuations (e.g. 4.1x EBIT) using the money it raised from public markets (i.e. shareholders) at much higher rates, or debt. While the strategy can be extremely effective in growing profits, investors would be wise to monitor occupancy rates, the purchase price and location of new centres, and cash flow, before buying G8 shares.
I held G8 shares for some time before selling because I lost faith in management's ability to keep growing the business. Moreover, I have found that companies which rely on rapid-growth 'roll-up strategies' delivered the lowest returns for my portfolio. Now, I keep a couple of shares in my portfolio as a reminder of how bad these strategies can go.
