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G8 Education Ltd sends Chinese investors to the naughty corner

digital

The G8 Education Ltd (ASX: GEM) share price could come under pressure when it returns to the ASX boards after the child care centre aggregator announced a $100 million share placement for insto investors at between $3.10 to $3.20 per share.

The company has been forced into the placement after a Chinese investor reneged on its legal agreement to invest $149 million into G8 in return for the issue of scrip at $3.88 per share. This keystone cops like news is not a good look for either G8 or the Chinese investor named as the China First Capital Group Limited (CIPI), with G8 shares last trading at $3.45

In today’s announcement G8 stated that the Chinese investor will now take up $31.8 million of shares at $3.88 having previously invested $63.8 million in exchange for shares.

Despite CIPI reneging on its deal, G8 Education has reportedly agreed to discharge it of all liability in relation to the monstrous default, with just some pretty light-on restrictions as to how many of its shares in G8 may be sold by CIPI as a percentage of total daily trading volumes in G8 scrip. The 30 percent daily limit over a 12-month period from the settlement of the re-arranged CIPI placement seems generous and the prospect of CIPI looking to sell its shares in G8 Education could spook investors.

Outlook

Given that its child care centre aggregation model is partly funded by a mixture of debt and dilutive capital raisings G8 Education is not my cup of tea as an investment prospect. The debt has to be serviced and today the company flagged that occupancy rates of 77.4% for the 12-month period ending April 2017 are down 3.4% from the prior corresponding period. The business looks to carry some substantial risks (including mysterious defaults) and I would prefer to elsewhere for investing opportunities.

For example shares in retail food outlet franchisor Retail Food Group Limited (ASX: RFG) look to be trading on an attractive valuation, despite the business also having some issues with the operating success of all its franchisee stores. Still Retail Food Group is aggressively looking overseas to territories such as the US, Asia and Middle East for more franchise growth and may just deliver for investors.

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The Motley Fool Australia owns shares of Retail Food Group Limited. Motley Fool contributor Tom Richardson owns shares of Retail Food Group Limited.

You can find Tom on Twitter @tommyr345

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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