Evolve announces NZ$63.5m capital raising

Evolve Education Group has this morning announced its intention to raise NZ$63.5 million via the issue of new shares to investors as it acts to strengthen its balance sheet and fund the initial phase of a planned expansion in Australia.

The move by Evolve, which currently has 123 early childhood education and care centres in New Zealand, is consistent with plans announced in November 2018 to address a sustained period of declining operating performance at the company and meet deferred repayment obligations to its primary lending bank.

The proceeds of the capital raise will see NZ$25 million allocated to acquire centres in Australia as it seeks to diversify its business across a second jurisdiction, NZ$5 million allocated to supplementing the working capital position in New Zealand and NZ$30 million will be applied to the repayment of bank debt with the balance to pay for the costs of the offer.

The deal is to be structured as an accelerated rights entitlements with each existing shareholder entitled to purchase new shares at a price of NZ$0.8 cents which represents a 25.8 per cent discount to the theoretical ex rights price. The offer is open to institutional and retail shareholders and entitlements will depend on their existing shareholdings and governed by a 4.4 to 1 pro rata ratio of new to existing shares.

Commenting on the announcement outgoing Chair Alistair Ryan said “This equity raise will improve Evolve’s financial strength as the company continues to execute the business turnaround that was “outlined to shareholders in November 2018” and “will also fund a tightly managed initial phase of an Australian expansion that will contribute positively to Evolve’s earnings.”  

Australian expansion to be led by ex G8 executive duo

The proposed expansion into Australia will be led by Chris Sacre, formerly Chief Financial Officer of G8 Education and Chris Scott, the Founder and former Managing Director of G8 Education, both of whom have extensive experience in acquiring, integrating and operating early education centres.

The team will seek to assess opportunities in Victoria, New South Wales and Queensland with a focus on centres in and around inner city areas with occupancy levels of at least 80 per cent and generating EBITDA of around A$500,000.

The intention is to use the NZ$25 million of the placing proceeds to acquire up to NZD$5 million to NZD$6 million of additional EBITDA implying the team are prepared to pay a multiple of EBITDA of between 4.2x and 5x.

Mr Sacre and Mr Scott, having been appointed to the board as non executive directors in November 2018, will see their positions reclassified as executive directors as they seek to implement the Australian Initial Phase strategy on behalf of the company.

Foundations of turnaround plan in place but benefits taking longer than expected

The first phase of the New Zealand turnaround plan, announced in November 2018, to rebuild and reset executive leadership across the organisation has now been completed with the recent appointment of Karen Shields as General Manager Quality Assurance and Professional Learning.

The new leadership team will now focus on continuing to execute the action plans created to ensure that the organisations eight strategic priorities are achieved.

The allocation of NZ$5 million from the capital proceeds will provide ongoing financial support to the plan’s execution.

Although the board continues to express full confidence in the Executive and the plan the company has noted that the necessary business restructuring has taken longer to implement than first envisaged and that the occupancy turnaround is now expected to become evident in the latter part of the financial year 2020.

Accordingly, the company is guiding FY20 EBITDA for the New Zealand business to be in the range of NZ$8.5 million and NZ$8.0 million, well below the current FY 2019 guidance of between NZ$13.2 million and NZ$13.6 million.

Group occupancy is currently tracking 2 per cent behind the same period last year and in light of this continued weakness an additional goodwill impairment of NZ$75 million will be taken bringing the total amount of goodwill impaired to NZ$107 million.

Capital raise to see debt profile rebased ahead of anticipated resumption of dividends

NZ$30m of capital raised will be used to immediately pay down outstanding debt in line with commitments made in Evolve’s capital management strategy that was agreed by lending bank ASB.

Immediately following completion of the offer Evolve will have a net cash position of NZ$17 million compared to a net debt position of NZ$43 million prior to the offer.

Excluding the NZ$25 million allocated to Australian acquisitions the net debt to underlying FY19 EBITDA will be 0.6x which is well within the stated goal of less than 2.0x for the business going forward.

The company also confirmed that it is their expectation that dividends will commence being paid post FY2019 and will seek to provide more specific guidance on dividend policies at their Annual General Meeting in August 2019.

The company will enter a trading halt post the announcement with the offer opening at 10:00am NZDT this morning and closing at 2:00pm NZDT tomorrow afternoon.

For more information on the capital raise please click here and for the presentation please click here.

For more information on the company please click here.