G8 Education confirms agreement to divest 31 centres

G8 Education has confirmed that it has signed a conditional agreement to transition 31 underperforming centres to a subsidiary of Genius Childcare. 

 

The portfolio of 31 centres, representing around 7 per cent of the current G8 portfolio, are located across Australia and are expected to lose around $9 million in profit before tax this year. 

 

“As part of G8’s commitment to optimising our network we continuously review our centres to determine which are meeting our high quality and performance standards, which centres can be improved and which centres would be better under different ownership,” Pejman Okhovat, Chief Executive Officer and Managing Director said.

 

“This agreement represents a significant milestone in our portfolio optimisation program and will leave us with a stronger network overall.”

 

Transaction will see G8 extend a lump sum payment to Genius to take on centres

 

Genius have agreed to take on the centres in exchange for a lump sum payment of $26.5 million, less fees and adjustments. The payment will help support post settlement costs such as ongoing commitments under the assigned leases and other working capital costs such as wages.

 

The long term leases that underpin the vast majority of early childhood education and care (ECEC) businesses in Australia can often act as a significant barrier to the divestment of low occupancy, underperforming centres as the businesses are likely to not have sufficient revenues to cover the ongoing lease obligations, which can be up to ten years in duration, post settlement. 

 

As a result, transactions that involve multiple underperforming centres are often structured in a way that sees the seller extend a cash payment to the buyer as an incentive to assume the responsibilities of the assigned lease and provide a financial cushion for the buyer as they work to execute their turn around strategies to a point where centre revenues can meet their financial obligations on their own. 

 

In turn, on settlement, the seller is released from the cumulative rental obligations that they would have had to pay for the remainder of the lease anyway or, should they wish to close the centre ahead of the lease maturity, from paying the landlord a lump sum to exit the lease early. 

 

G8 likely to see substantial lift in group occupancy post settlement 

 

Although G8 Education did not provide any details or guidance it is understood that the divestment of the 31 centres, all of which are impaired or significantly impaired and trading at low occupancy levels, will see the average occupancy of the remaining around 400 centres improve materially once the divestment is complete.

 

Notably, the Group confirmed that occupancy, including the soon to be divested centres, was 75.4 per cent as at the week ending 22 October 2023, 1.4 per cent lower than the same week in 2022 and 2.2 per cent lower than in 2019, pre-COVID. 

 

Completion of the divestment of the centres is targeted to occur in mid to late December 2023 or early 2024, and may occur in multiple tranches depending on when conditions are met.

 

“While there is some way to go in the process, we have every confidence that Genius Education Group will provide the ongoing high level of service that the children, families and our team at these centres expect and deserve,” Mr Okhovat said.