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EXCERPTS
ABC Learning founder Eddy Groves has been implicated in a $3 million secret deal that appears to have cost fellow executive director Martin Kemp his job at the child-care giant earlier this year.
The extraordinary deal, for Kemp to sell to ABC three child-care centres he owned, is one of a host of related-party transactions involving key executives at ABC Learning &emdash; deals that non-executive directors claim they were unaware of.
The uncovering of the previously undisclosed transactions, as forensic accountants pore over ABC's books, is a key reason why shareholders in ABC have yet to see &emdash; and may never &emdash; the 2008 accounts for the business.
Instead, two major insolvency firms and one major audit partnership, plus a team of investigators from the Australian Securities and Investments Commission, are examining ABC's entrails.
When the worlds of Groves and ABC Learning crumbled this year, the shudders were felt at the highest levels in Canberra, with Deputy Prime Minister Julia Gillard having to weigh in to reassure the families of 110,000 children, and tip tens of millions of dollars into the kitty to keep the ABC centres open beyond Christmas.
The last official estimate of ABC Learning's losses for the year to June was $437 million, before receivers and administrators took control in October &emdash; but that number is believed to have ballooned to closer to $1 billion.
The difficulties they are having coming to grips with ABC were evidenced again yesterday when receiver Chris Honey, from McGrathNicol, said he was delaying until next week clarification on the future of 386 of ABC's more than 1000 centres, which he said a week earlier were "under review".
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A week earlier, Honey had said during a briefing on ABC that the state of the records on ABC's centres was "not good" and that it had required considerable reconstruction to work out which ones were viable, and which not.
That opacity fits with evidence that it was the arrival of ABC's new auditors, Ernst & Young, and senior executives, such as company secretary Matthew Horton, bringing with them tougher corporate governance requirements, that exposed previously unknown arrangements and hastened the company's demise.
The more ABC disclosed, the more analysts doubted how sustainable its earnings were, making it vulnerable to the attacks on its share price that forced the Groves, Kemp and director David Ryan to sell their stock.
The new regime also meant, however, that the free-wheeling, deal-making days of Groves and his cohort were over. The family-based company that grew out of a single child-care centre in Brisbane, and still had relatives and friends scattered through senior management and as business partners, needed a more professional structure to match the demands of being a $3.5 billion darling of apparently untrammelled growth on the stock exchange.
It controlled the lion's share of child-care centres in Australia with tens of thousands of families and children on the books here and overseas, 16,000 staff and 35,000 shareholders who thought they had backed a winner.
Even without the latest "survival" funding from the Federal Government, ABC receives between $25 million and $35 million every month in child-care benefits. That's before additional cash it gets for its subsidised child-care training operations, and other government care benefits.
None of that was, however, enough to get around the fact that ABC had paid too much to expand too fast; that its extraordinarily complex internal structures had masked for too long that its child-care business was not as profitable as everyone thought, and that earnings were being bolstered by "liquidated damages" payments from property developers and revaluations of acquired assets.
At that stage it still had Groves as chief executive, his wife Le Neve as a co-boss. His sister, Lorraine Zullo, worked as a commercial manager &emdash; and her ex-husband's companies earned millions of dollars for supplying playground equipment and maintenance to the hundreds of centres. Groves' girlfriend, Viryan Collins-Rubie, was at one point associated with an arm of the company, Neighbourhood Early Learning Centres. There are also stories that a private company associated with Collins-Rubie helped supply ABC with teddy bears as gifts and for use in the centres.
The Kemp and Groves families had investments together in other companies outside ABC: such as ELMM (Eddy, Le Neve, Martin and his wife, Mary), which until May this year was equally owned by the two families. ELMM in turn owned a significant stake, and still does, in Ezi Debit, which handled payments for many ABC parents.
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Kemp left the company entirely, his departure as chief executive of the Australian and New Zealand operations explained as the logical outcome of ABC securing what it hoped was a lifesaving $700 million deal to sell control of its US business to investment bank Morgan Stanley. The reasoning was that with a diminished overseas presence, ABC had too many senior executives with both Kemp and Groves &emdash; so one had to go.
In reality, Kemp's staggered departure followed an internal investigation into a deal initiated around January 10 when the fall in ABC's share price was accelerating &emdash; and Kemp had begun selling shares to meet margin calls.
The Age has learnt that Kemp approached an in-house solicitor at ABC Learning and asked her to draw up contracts for the company to buy three additional child-care centres for more than $3 million.
That same day, Kemp had disclosed to the stock exchange that his stake in ABC had shrunk by 1 million shares over the previous three days. A week before Christmas, Kemp announced he had sold another 600,000 shares. ABC's share price had gone from $6 to below $5 in a matter of weeks.
For the child-care giant's shareholders, who last saw their shares trade in August at 54¢, the January decline in the shares was just the beginning of a long dive into oblivion.
It is believed that non-executive directors at ABC were unaware that Kemp had a potential conflict of interest in still owning child-care centres through his private companies. Approached, again, last night to comment on the deal, Kemp declined to discuss it.
Kemp joined ABC not long after the company listed in 2001 when he and his wife Mary sold it their child-care business, known as Premier Early Learning, for $8.3 million in cash and shares.
Premier Early Learning Services, a company jointly owned by the Kemps, changed its name to Silipo in mid-2002. Annette Cunado, managing director of Kids & Adults Learning in Brisbane which manages the three centres, confirmed this week that two that two of the child-care centres Kemp tried to sell to ABC last January are owned by Silipo, and that the other is owned by Volbane &emdash; another Kemp family company. ASIC filings show Volbane entered into a $30 million margin facility with Citigroup in December last year.
Buying the centres was also against an explicit ABC board ruling in late 2007 that the company should not buy any additional child-care centres, in Australia or overseas, because it needed, as one insider puts it, "a year of consolidation".
The board is believed to have made that ruling only after Groves and others ignored earlier suggestions they stop buying centres because ABC was seen to be paying too much. The strictures also came at a time when ABC was negotiating a $1.4 billion debt facility in a world of tightening credit.
The Kemp deal would also be a related-party transaction, and would at least have required board sanction, if not a shareholder meeting to approve it.
ABC's in-house lawyer is believed to have sent an email to Groves, who was in the US at the time, seeking authorisation for the Kemp deal.
She received a response which she interpreted as Groves' approval of the purchase, although ABC's then chief executive would later argue that what he approved was the process of the purchase, not the payment to Kemp.
Sources estimate Kemp received about 70 per cent of the money, $3.08 million, as a "deposit" &emdash; but in spite of assurances from Groves that he would eventually deliver, the centres were not handed over to ABC.
ABC is believed to have held back some of Kemp's final payout entitlements to try to settle the matter.
The internal investigation also suggested that Groves' "approval" of the deal left him vulnerable. It is believed the board decided to give Groves the benefit of the doubt, and was concerned about the risk to the company of losing its founder and most senior executive when ABC was already fighting for its life amid crashing profits and a decimated share price.
Instead, he was retained, but on what the board hoped was a shorter leash. It wasn't until the end of September that the uncovering of more undisclosed related-party deals forced chairman Ryan's hand. While the amounts of money were not large, the issues were of principle.
The final trigger is believed to have been the leasing costs to ABC of a helicopter that were running at $33,000 a month. The leasing company, Helicopters Brisbane, was once part-owned by Groves and it was still leasing out a helicopter he owned.
ABC was also carrying on its books the cost of a 25 per cent share in a Gulfstream jet, thought to have cost it some $US11 million, from Warren Buffett's NetJets Inc. There are reports of Groves having flown in it to Las Vegas in 2007 at the time of NetJets' annual poker tournament, and using it to go to the Rugby World Cup in Paris later that year.
Insiders say Ryan steeled himself by smoking half a pack of cigarettes before telling Groves his time was finished. The ABC founder, accompanied by PA Brian Tribe, was escorted to a waiting limousine for a ride into history. His estranged wife Le Neve left the same day.
After years of presenting a publicly united face with Eddy, Le Neve has now decided to push not just for divorce but a $40 million-plus settlement. The Australian Tax Office is noted for closely watching the details of such cases and making sure it gets what it thinks is its fair share of the pie.
John Walker, from litigation funder IMF (Australia), is waiting to launch a class action on behalf of investors to try to recover some money. Their chance of success may depend on whether more than $250 million repaid to ABC banks in June can be clawed back, and how good the banks' security is.
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And old mates of Eddie, such as ex-army officer Don Jones, are suing the company. Jones' private businesses have procured sites and staff for ABC, and the same day as Eddy was finally sent packing in a limousine, ABC announced it was buying Jones'
123 Careers for $70 million.
The deal, however, was never finalised and ABC wants its $40 million deposit back while Jones claims the company has cost him up to $200 million in lost income.
- reprinted from The Age