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EXCERPTS
Until six months ago, the world's biggest child care operator, ABC Learning, looked like one of Australia's great corporate success stories.
Looks can be deceiving, as ABC's investors discovered the hard way.
Beneath the smiling veneer there is deep trouble in the kids' kingdom, Australia's most heavily Federal Government-subsidised company.
ABC Learning requested a trading halt on its shares four days ago, as a deadline loomed for its latest financial results.
Bear in mind the company had already flagged that it would have to declare a pre-tax loss of $437 million - information that triggered a further slump in the share price.
That has now fallen from last year's high of $8.80 to just 57 cents at the latest trading halt.
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The rise and rise of enigmatic founder, known to many market analysts as 'Fast Eddy' for the speed of his speech, now seems somewhat souffle-esque, as bank lenders, government, prominent Australian investors and thousands of small shareholders awake to the painful reality they may have been taken for one of the biggest rides in Australian corporate history.
Deborah Brennan, a professor at the University of NSW Social Policy Research Centre, says ABC Learning could be one of the most spectacular public policy disasters seen in recent time.
"[It] is something that could become a case study, I think, in many business schools and public policy schools around the world," she said.
IMF Australia's John Walker says his company was approached by shareholders involved in ABC Learning, and was asked to look at whether or not there were potential breaches of the Corporations Act.
He found that the company never really made money over the last four years.
Mr Groves managed to attract finance to spawn an empire of 1,136 ABC child care centres across Australia, 2,000 across the globe, and in so doing, mislead the market, the nation and the world as to the company's financial viability.
"I didn't buy it five years ago, I didn't buy it three years ago, I didn't buy it last year and I wouldn't buy it today," Clime Capital's Roger Montgomery said.
'Fast Eddy', the man Mr Groves is a gambler with a high-rolling history in casinos from the Gold Coast to Las Vegas.
But his ballooning child care corporation, established in partnership with his wife Le Neve, from whom he separated, gambled mainly with other people's money - and lots of it.
Behind the facade was a massive real estate play, but on the surface a listed child care service, which attracted a total of $3.5 billion in bank securities, investors' money, and heavy federal government subsidies.
It was the equivalent of $1 million a day in child care rebates. All of which were then filtered through a labyrinth of private companies closely related to Mr Groves himself.
The first ABC Learning acquisitions and the 1, 2, 3 Global group of companies were privately owned by the elusive Don Jones and his wife Heather, until this month when she ceased to be a director.
As Mr Jones' company individually employs less than 50 people, they are not required to lodge financial returns with ASIC.
Professor Brennan says as business analysts and researchers dig more deeply into ABC Learning, it is becoming clear that the company did not make the profits it did in the past through bulk-buying nappies.
"We are actually talking about a very complex corporate structure, and I think that the guardians of the public purse have really not been watching closely enough what has been happening," she said.
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Where has the money gone? Has profitability been an illusion, given the costly questions the new auditors have posed about previous accounting practices?
It appears from 2005 until 2007 ABC paid about $1,040 million to buy leases and childcare licences from so-called developers - particularly Mr Jones' companies - who would return funds back to the centre to achieve its budgeted revenue.
Profitability
Everything looked rosy as, under the old auditors, payments from these developers were not disclosed but were shown as revenue, without which ABC's profitability was poor to non-existent. Take, for example, 2006.
The IMF's Mr Walker says that 20 to 25 per cent of that year's profit earnings were derived from the sale of the right to provide employees to ABC-owned centres.
"About 20 odd per cent of that year's profit, by way of example, just wasn't as stated," he said.
"Similarly, the financial transactions that the company's entered into with developers, it turns out - and only recently disclosed - that a big portion of earnings is being derived by transactions with developers."
Though Mr Groves denies these are related party transactions, Mr Jones' companies have principally operated from ABC headquarters or offices. ABC's CEO was known to have been active in establishing at least one of them.
Mr Jones' companies appear to have received at least $880 million from ABC Learning.
If Mr Jones' companies are not related to Mr Groves', Queensland Maintenance Services (QMS), formerly known as Groves Corporation 2, run by Mr Groves' brother-in-law Frank Zullo, is.
QMS, listed at the same address as Mr Groves, was awarded $74 million for un-tendered work for ABC in 2006 alone - $100 million between 2003 and 2006.
When accounting issues began to emerge and the new auditors in February revealed a 42 per cent slump in half yearly profits, triggering a 70 per cent fall in shares, Mr Groves berated hedge funds for short selling his company stock.
Sadly that day, shareholders of this great Australian company got their first glimpse of ABC's modus operandi.
But ABC Learning centres soon set about re-branding many of its child care facilities, delegating their operation to a company called Neighbourhood Early Learning Centres, a private company owned by Mr Groves' brother-in-law.
Mr Walker says there was speculation as to whether or not they were arm's-length transactions.
"The concern of the market though, is that it wasn't informed of the fact that these transactions were generating or purporting to generate revenue being derived from the transaction rather than from fees being paid by parents," he said.
Domination
Before the new auditors lanced Mr Groves' burgeoning balloon, forcing a sale of assets, ABC was gluttonously gobbling up child care centres from the UK to America.
Last year, Mr Jones' 1, 2, 3 Global companies began approaching child care centres across Canada, triggering a wave of protests. ABC Learning denied any involvement, but the Canadians didn't believe them.
Professor Brennan was flown to Canada to talk about ABC Learning in Australia.
"It was a very strong activist and early childhood community in Canada that really wanted to ensure that public money is used for the benefit of children, and not for the growth of enormous private and corporate profits," she said.
"Canadians were asking me when I was over there 'How come you have designed a system that's allowed one individual to become the richest person in Australia under 40, and yet you have a system with poor quality standards, where 40 per cent of the staff have no qualifications whatsoever?'"
Huge losses
But there are many who have bought the Mr Groves story completely.
The Singapore Government's investment company last year spent $400 million buying shares at $7.30, to buy 12 per cent of the company, which has so far lost around $350 million in value.
And the Commonwealth Bank is believed to have almost a half a billion dollar exposure to ABC in loan securities or convertible notes, and another several $100 million more in senior debt.
And the Commonwealth is not alone. The total debt due for repayment in just two years is $1.45 billion.
In 2005, when he was with Merrill Lynch, Invesco's investment manager Andrew Perks was attacked after expressing concerns about ABC's tendency to overpay for acquisitions and how the company inflated the values of intangibles or non-physical assets such as brands.
"It was a market darling, it was fast growing, it was raising lots of equity, it was raising lots of debt, that's very attractive to bankers and to stockbrokers. But when I looked at it I was concerned that the ultimate shareholder might not have been sharing in that upside," he said.
"The asset side was largely intangible. I think it got up to almost $3 billion Aussie dollars at the end of June 2007.
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Strong concerns about ABC's questionable revenues were directly brought to the attention of the regulator ASIC in 2006, but ASIC chose not to act.
The Federal Government also remains amongst the believers, even after its recent announcement the child care rebate would be increased to help parents cope with the increasing cost of child care, only to see ABC increase its fees.
There was little anyone could do. ABC remains Australia's biggest child care provider. But what happens if, in the worst-case scenario, it was to collapse? Assuming, of course, the banks allowed that to happen.
"I'm also quite critical of a number of politicians and policy makers, who I think have really turned a blind eye to what's been happening in child care in Australia, and who have not been very effective guardians of the public purse," Professor Brennan said.
"Without wanting to speculate at all about the future of ABC Learning, I would just make the point that such a level of exposure to a single company is a matter of great concern."
- reprinted from ABC News