G8 confirms capital raise, outlines impact of COVID/relief packages

G8 Education has provided an update on how COVID-19 and associated Government support packages have impacted operations, and confirmed it will raise $301 million through the sale of new shares as it shores up its cash reserves to support the business through the COVID-19 pandemic and beyond.

The raise will see $134 million of new shares placed with institutional investors and a further $167 million issued by way of a non renounceable entitlement offer to existing shareholders, who will be able to purchase new shares in the company based on a predetermined ratio of one new share for every 2.2 shares already owned for $0.80.

The capital raise will see financial leverage metrics and liquidity improve and provide comfort to stakeholders, including financial institutions, that G8 has sufficient resources to navigate the balance of the COVID-19 pandemic.

Commenting on the transaction CEO Gary Carroll said “The equity raising we have announced today, along with other capital structure and operational initiatives, will ensure G8 is well positioned to navigate the current period and emerge from it in a strong position capable of  delivering the high quality services that Australian families expect of us.”

Summary of support package contributions on business highlighted for first time

For the first time since the pandemic commenced and G8 also confirmed the impact that Government packages would have on the business. 

G8 will be eligible for Federal and State funding packages including the ECEC relief package, JobKeeper payment and also state payroll initiatives, specifically in New South Wales, Queensland and South Australia. 

With respect to the ECEC relief package, G8 have estimated they will receive $33 million a month in revenue payments, which is equivalent to around 46 per cent of the base period of the fortnight prior to 3 March 2020. 

With respect to the JobKeeper payment, G8 will receive $25 million a month to be paid on to eligible employees. This will help them offset their $43 million a month pre COVID-19 wage expenses, and, when combined with an additional $2 million in savings, takes their monthly wage expenses down to $16 million a month. 

They have assumed a 20 per cent reduction in rent, although the new Code of Conduct for lease arrangements would imply larger cuts are available for tenants going forward, and a reduction in child care expenses and other overheads of around 21 per cent as lower occupancy is accounted for. 

The total impact on earnings suggests that G8 will break even on a cash basis for the duration of the ECEC Relief Package implementation and whilst other COVID-19 supports are in play.

Revenue reduction mitigation measures to include underperforming centres exited

The company will be pursuing a range of measures designed to help offset the falls in revenue experienced and include both cost related initiatives but also centre exit strategies. 

With respect to the latter the company has confirmed that a review of their portfolio is ongoing and there is the potential to exit underperforming centres, either on an individual or portfolio basis. 

Notably, should any break costs be associated with these divestments they will be funded from the proceeds from the capital raise. In addition it was highlighted that a consequence of this initiative could be the  impairments to the carrying value, ie: Goodwill, of assets on the balance sheet.

Elsewhere the company indicated that focus would remain on managing overall centre wage levels in accordance with anticipated falls in occupancy through roster optimisation, encouraging team members to utilise accrued annual leave, pairing back capital expenditure to essential items only, discussing rental reductions with landlords and passing a 20 per cent fee reduction for all company board members. 

Capital raise boosts balance sheet against backdrop of supportive lenders

The addition of $289 million in new cash into the business will provide a substantial cushion to support operations over the course of balance of the COVID-19 pandemic and beyond. 

As at 31 December 2019 G8 had debt of $395 million with a further $105 million undrawn from its total facilities of $500 million. 

They also had $41 million in cash on their balance sheet at that point in time. 

Using the 31 December numbers as a base, the injection of a $289 million of new capital into the business will see net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) fall from 2.3x to 0.4x with cash increasing to $330 million against drawn debt of $395 million. 

The company has indicated that a portion of the raised capital will be allocated to pay down debt, but given the strong support provided by lenders it is expected that the majority of cash raised will remain on the balance sheet to support the business going forward.  

Meanwhile future dividends have been suspended as an additional cash preservation measure. 

To read the announcement please click here. 

To read the capital raise presentation please click here.