Think confirms the acquisition of 11 centres from former lead incubator Edhod

by Jason Roberts

October 21, 2019

Think Childcare (Think) has confirmed the purchase of 11 early childhood education and care (ECEC) centres from Edhod Pty Ltd (Edhod), formally the Group’s main incubator, for a total of $16 million. 

 

The portfolio comprises eight purpose built Nido Early School centres, one service that has been transitioned to a Nido Early School and two centres that are new but not Nido branded that will require rebranding going forward. 

 

The centres will add a cumulative 1,051 license places to the Group and are expected to generate $4 million of earnings before interest and tax (EBIT) in CY2020. 

 

Chief Executive Officer Matthew Edwards noted on the announcement conference call that the transaction will underpin the business of Think and move the “focus to driving operations as supposed to acquisitions.”

 

New portfolio adds to WA, NSW, VIC and SA networks as Nido branded centres jump

 

The portfolio of acquired centres will see one centre added in Western Australia, three in South Australia, five in Victoria and two in New South Wales and will see the overall number of Nido branded centres in the Group increase from 33 to 44. 

 

The centres are expected to settle on 30 October 2019.

 

The move to increase both the absolute number of Nido centres in the Group as well as the proportion of Nido centres relative to non Nido branded centres is consistent with the Group’s strategy to focus on building out the Nido brand as a ‘best in class’ early education and care offer combined with innovative and high quality environments. 

 

After the acquisition of the 11 Edhod centres the percentage of total centres owned and operating under the Nido brand will increase to 63 per cent from 56 per cent. 

 

Transaction signals progress by Edhod receivers and removal of uncertainty for Think

 

The transaction of these 11 Edhod centres marks the first such announcement confirming that the receivers, after having taken control of the holding company in June 2019, are making progress in unbundling the Edhod portfolio on behalf of the company’s secured creditor. 

 

In addition, the purchase of the services marks the removal of significant uncertainty regarding the fate of Edhod centres that were originally earmarked to be acquired by Think but were placed in limbo post the receiver’s appointment. 

 

Of the remaining 35 sites, seven of which are older centres trading as Early Learning and Kinder Services, four of which are Nido branded centres and 24 which are at various stages of approval, it is unclear what the receivers intentions are suffice to say that they continue to consider a range of options for the centres. 

 

Terms and timing of transaction look to favour Think going forward

 

As well as confirming that the 11 centres will generate a total of $4 million of EBIT in CY2020, the Group confirmed that Think will not pay Edhod any earnout amount post acquisition. 

 

An earnout is an arrangement whereby if a purchaser is able to increase occupancy materially above the level at which the centre was acquired, an additional lump sum in consideration is paid to the seller. 

 

In this instance Edhod will forgo any earnout arrangements meaning that Think, should they be able to drive occupancy up to the same levels as their other incubator acquisitions of 97 per cent, will be able to retain 100 per cent of the additional income for themselves. 

 

With respect to the timing of the transaction the additional earnings purchased will match those expected in 2020 anyway, meaning that the impact of the Edhod challenges will not impact on medium term growth prospects of Think. 

 

The transaction will be funded by the existing debt facilities in place with Macquarie Bank, specifically Facility B and post transaction will see a total of $24 million in headroom remaining.

 

Executive team strikes a positive note on sector conditions

 

In the announcement and on the conference call Mr Edwards struck a positive note on sector conditions highlighting an increase in acquisition appetite from both onshore and offshore buyers, and a generalised sense of continuing buoyant enrolment and enquiry levels. 

 

Think enrolments were said to be around 1 per cent to 2 per cent higher than the same period last year and the management team were optimistic about 2020. 

 

Speculative development levels also appear to continue to abate as banks and landlords have tightened lending and security requirements resulting in rents normalising, tenant covenants ie: the quality of prospective operators seeking to rent premises becoming more important and large developers focusing on infill opportunities which compared to growth areas tend to be less frequent. 

 

All of these factors taken together support a view of reducing supply. To read more about the announcement please click here and for the presentation please click here.  

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