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In the $55 billion U.S. child care industry, nap time is officially over. Nursery school chains are consolidating, and chief among the buyers is ABC. Headquartered in Brisbane, Australia, ABC jumped into the U.S. market early last year and has spent $555 million in deals for La Petite and two other chains.
Already the world's biggest babysitter, ABC is now the number two player in the U.S., second only to Knowledge Universe Education, cofounded by former junk-bond king Michael Milken and his brother, Lowell. Privately held Knowledge Universe, headquartered in Santa Monica, Calif., boasts 2,000 centers in the U.S. ABC, which is listed in Sydney, has 1,100 centers here and 2,238 worldwide. Both companies see lots of opportunities for more dealmaking: The U.S. industry is so fragmented that the ten biggest chains account for just 5% of the market.
The honeypot drawing ABC is a growing stream of government money. The U.S. already spends $25 billion a year on babysitting and preschool for poor children. Now some politicians want taxpayers to fund voluntary "universal preschool" for all 4-year-olds (and some 3-year-olds) no matter what their parents' income bracket. States are spending $4.2 billion this year on pre-K programs, up 45% in two years. Hillary Clinton wants the federal government to chip in another $10 billion over the next five years.
ABC told investors in May that 25% of its U.S. revenue comes from government contracts.
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Indeed, while politicians debate whether public money should go to privately run grade schools and high schools, they're already sending cash to private nursery schools. Georgia, which launched universal pre-K in 1995, gives centers $4,000 per pupil; the centers are lobbying for a raise. In Oklahoma, which adopted universal pre-K in 1998, providers contract with public school districts; Learning Care runs 7 nursery schools there. It has similar contracts to run 6 in New York and 40 in Texas.
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Back home in Australia, where 10% of children up to age 5 attend one of its centers, ABC has come in for quite a bit of criticism. Last year Labor politician Michael Danby attacked the company's founder and chief executive, Edmund Groves, on the floor of Australia's House of Representatives: "What he has done is get rich by milking government subsidies." The Australian press has branded Groves Fast Eddy, with the Sydney Morning Herald running an article about him under the headline "Cradle Snatcher." The Australia Institute, a think tank, put out a 38-page report last year that anonymously quoted ABC employees saying the chain didn't provide adequate food to the children and understaffed its centers. The report urged more government regulation. Groves calls the criticism unfounded and adds that ABC's staff turnover is a low 10% a year. "We like to chop down the tall poppy here," he says. "We're not like the U.S., where they embrace people who have been successful."
ABC certainly owes its success to government funding--it represents 40% of its revenue in Australia. In 1988 Groves, then a 22-year-old milkman, started with one day care center in a Brisbane suburb. ABC grew slowly, until the Australian government started offering generous child care payments to parents. For-profit centers now have 70% of the market versus 40% in the U.S. Groves, who bought the Brisbane Bullets basketball team in 1999, took ABC public in 2001 and expanded by buying up competitors. Then he moved abroad--to New Zealand in 2004 and last December to the U.K. He's poised to become the biggest child care company in the U.K., where he announced in August that ABC will buy Leapfrog Nurseries for $63 million. To raise cash, Groves sold a 12% stake in May to Temasek, the Singapore government's investment arm. He and his wife, Le Neve--who has a background in early childhood education and is ABC's chief executive of education--own a 9% piece worth $210 million.
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- reprinted from Forbes Magazine