How are does $22 million go in the child care industry? Not far if the company involved is ABC Learning. Unfortunately, the company still hasn’t released its most recent financial results so we have to go back to the last statement released in December 2007.
For the year it had total expenses of $1,057,400,000. Those expenses helped the company to generate revenue of $1,106,900,000. After tax ABC Learning achieved a profit of $37 million. In other words a 3% profit margin.
So based on these numbers the company could eat through the government support money within about 10 days. In reality it won’t as we are sure it will still achieve some revenues of its own.
But is there any guarantee that taxpayers will get any of that $22 million back? If so then it will be at the expense of other creditors to the company.
Federal Department of ABC Learning
Which is more important in the current economic conditions? The government being seen to ‘do something’, or allowing private enterprise to take advantage of market conditions.
Based on the evidence of last Friday it is the former. As you may have read, the federal government is tipping $22 million of taxpayers’ money into a failed private business. To be fair, it isn’t much. It is only a few dollars for each taxpayer.
But there is a bigger problem with it. First, does it represent the beginning of the beginning for government sanctioned bail outs? We’ve seen in the US how once the flood gates are opened, there is no stopping it. Remember the USD$700 billion Troubled Asset Relief Program (TARP) which was supposed to provide liquidity to credit markets? Now it seems as though it will be providing relief to Ford, General Motors and Chrysler as well.
Just as important is the message it sends to other businesses. What about all those successful child care centres out there? Many of them are run on a for-profit basis, and many are run on a not-for-profit basis. Most of them have not gone through with a stock market listing, and they have not put themselves into hock in order to go on a frenetic domestic and international expansion programme.
Instead they have grown their businesses responsibly and have provided a reliable service to the community. Their reward for running a good business? They now face competition from the new government backed ABC Learning Centres. Of course, they had competition from ABC before, but now they are being denied the opportunity to take on new business from ABC centres that would have closed, plus they are being denied the opportunity to potentially buy these centres at bargain basement prices.
The argument from government is that they are helping working families. The reality is that they are helping to save the bacon of a failed business.
NABs $4 Billion Cash Grab
We are still yet to be convinced by anything coming out of the banking sector. Last week we were treated to the admission by the major banks of their exposures to ABC and Allco.
At the start of this week we have the National Australia Bank raising $2 billion to “strengthen further its capital position.” This amount is approximately the same as the amount raised during the previous six months from the dividend reinvestment plan (DRP).
Importantly, it shows a big change in the bank’s capital position between 2007 and 2008. During 2007 the NAB did not issue new shares for its DRP. Instead it effectively used the dividend cash to buy shares from the market to give to the shareholders. Evidently the bank did not need to ’strengthen” its capital position at that stage.
In 2008 it has been a different story with the bank already issuing about $2 billion of new shares for the DRP. The effect of issuing new shares is that it retains the cash that it would have paid out in dividends while diluting the value of existing shares in issue.
Now it is raising at least another $2 billion from institutions. With the NAB market capitalization now at $38 billion that represents 10% of the bank’s value that it has needed in cash from the market this year.
Do we still think Australian banks have come through this market unscathed?
Cheers,
Kris
