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EXCERPTS
There is a slight whiff of irony that in January this year Centrelink announced it had reached an agreement with a subsidiary of ABC Learning Centres to provide child care for its staff. For it is Centrelink which pays out hundreds of millions every year in the income-tested Child Care Benefit subsidy to nearly 600,000 eligible families.
ABC Learning derives nearly half of its $1 billion income from the guaranteed stream of CCB subsidies paid by the Federal Government on behalf of each child in care. But this week ABC Learning and its flamboyant and high-flying owner, Eddy Groves, ran into the shoals of a rocky stock market still reverberating from the US sub-prime crisis, suffering a dramatic 42 per cent profit drop to $37.1 million.
Last year Centrelink paid out $1.4billion in CCB to children in the 10,700 federally accredited child care centres around Australia, 1095 of which are run by ABC Learning.
The company, which floated in 2001 with a market capitalisation of $25 million, has since become the world's largest listed provider of child care services. With services in New Zealand, the US and Britain, ABC Learning now faces being broken up after Gold Coast-based Groves' ambitious expansion has been brought to a juddering halt.
The 42-year-old multi-millionaire has had a horror week, beginning with the half-yearly result on Monday and followed on Tuesday with a share price plunge by nearly 70 per cent to $2.14, reportedly leaving the young entrepreneur shaken.
The following day, ABC Learning sought a three-day halt to stock market trading as it faced a barrage of questions from the ASX, eventually revealing that four of the company's directors, including Groves and his educationist wife Le Neve, had been forced by margin calls to dump $45million of their own shares in the company.
Apart from dealing with more questions from the ASX, the company now has the Australian Securities and Investments Commission sniffing around the practice of company directors getting involved in margin loans to buy company stock. Even the Federal Government has expressed concern at the financial turmoil of ABC Learning, saying child care places must be protected.
The view of the stock market analysts is that the company has overextended itself on its US purchase in 2006-07 and is barely covering its outgoings while servicing debt of up to $1.7 billion.
It's been a long journey for the man who started out as a bank teller and later bought a milk run covering several Brisbane suburbs.
In 1988 he bought the first child care centre in the Brisbane suburb of Ashgrove and, as Groves likes to point out in media interviews, he ran it successfully without any government subsidy. A multi-millionaire by age 25, his wealth was put at $262 million at its peak in 2005 and he was top of the BRW young rich list the following year. Groves steadily built up his business, owning 43 child care centres in Queensland before the float in 2001 and then expansion.
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As ABC Learning's financial crisis filled news reports during the week, file television pictures appeared of a blond, mullet-headed young man in skin-tight jeans whooping it up with the kids at an ABC Learning child care centre.
The south Queensland identity always seemed to have cash to burn and in 1999 he stepped in and saved the financially stricken Brisbane Bullets basketball team, becoming an avid fan.
In spite of the public glare, Groves has been seen this week attending matches in the Brisbane Bullets' best out of three semi-finals play-off with the Melbourne Tigers in the southern capital.
Groves is not without political connections, having made donations to the Liberal Party in the past, and he even enticed the former federal minister responsible for child care, Larry Anthony, on to the ABC Learning board only five months after he lost his seat in the 2004 federal election. Another non-executive director on the board is former prominent Liberal and Lord Mayor of Brisbane, Sallyanne Atkinson.
Groves, who left South Africa with his family at the age of four, has been both heralded and demonised for his impact on the child care industry.
On the one hand, he almost single-handedly took the industry out of the relative genteel poverty of the council or community-based child care centre to a new standards of equipment and marketing. On the other, his critics believe he has "McDonalds-ised" what should be a community-based, guaranteed and protected service for children rather than a commodity left to the mercy of the market.
Until the early 1990s, child care was strictly the province of the local council, government or the community not-for-profit sector until the then Keating Labor government made child care subsidies to the private sector in a bid to meet spiralling demand for places.
National convenor of the National Association of Community-Based Children's Services Lynne Wannan says many parents must be worried what will happen if ABC Learning goes under.
"With one operator controlling so much of our early childhood system, that's a big risk if they had to close the services it would be pretty difficult for a lot of families," Wannan says.
"It's always been a bit of a puzzle to the community-based sector that somebody could become a multi-millionaire out of operating children's services because we know the costs are to some extent fixed and they are predominantly staffing and it's regulated."
The private operators now make up about 30 per cent of the child care sector and Frances Press, senior lecturer in early childhood studies at Charles Sturt University, believes having such a large player leaves regions vulnerable if it is forced to close, leaving parents with no choice.
"When an empire crumbles, what happens to all of those people dependent on child care places?" Press says.
"When you're strapped for cash, what are you likely to do? The things you are likely to cut are staff, staff qualification, staff numbers, food and equipment."
There are more than 80,000 people employed in child care centres around Australia, 16,000 in ABC Learning alone.
The expansion of ABC Learning was rapid. Within two years of the float, it had more than quadrupled its size with 187 child care centres, taking over Childs Family Kindergartens in NSW and the ACT in 2003, and Early Learning Services, Child Care Centres Australia and Peppercorn Management in 2004.
Groves himself says he has built more than 100 state of the art child care centres around Australia and re-invested nearly $100 million into centres in the past 12 years.
By 2005, ABC Learning had more than 770 centres around Australia and in the following year the company went international, buying more than 1000 preschools in the US, 112 nurseries in Britain and 116 child care centres in NZ.
A common criticism of Groves' methods has been that he floods the market with services by building a child care centre for roughly every 10,000 people and then undercuts the competitors on fees, often offering two to three weeks free care to sign up.
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"In many ways they've shaken the industry up. It's made child care more visible," Latham says.
The marketing style has also appealed to young people entering the workforce who see child care as an attractive career option and no longer the preserve of part-time working mothers.
Latham believes the industry is strong enough to withstand the current ructions.
"I think the whole industry has a duty to say that child care is child care and it's not going to collapse like a pack of cards," Latham says.
But Early Childhood Australia, which represents non-profit, non-government child care centres, sounded a note of warning yesterday about private sector child care, seeking closer government scrutiny of services.
While ECA chief executive officer Pam Cahir won't speculate about the future of ABC Learning, she says the interests of children, families and staff must be protected.
"We also believe that Government must ask itself whether child care services which are so core to the development of young children, not to mention the long-term productivity of this country need some form of protection from the vagaries of the market," Cahir says.
Many in the industry see ABC Learning's predicament as a wake-up call as to how vulnerable an essential industry can be in the hands of the market.
"What covers most child care fees is the subsidy through CCB, so that's kind of public money propping up that system, which I think we're now seeing is inherently insecure," Press says.
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- reprinted from The Canberra Times