As we covered on Wednesday, G8 Education Ltd (ASX: GEM) shares entered a trading halt following the failure of its would-be significant investor, CFCG Investment Partners, to stump up $150 million for G8 shares.
Unable to agree on a date for an extension, G8 terminated the agreement with CFCG yesterday afternoon for a breach of the agreement. G8 requested that its shares be suspended until Tuesday 23 May, to give the company time to consider its options regarding the shares which would have been issued to CFCG.
As I noted in the hyperlinked article above, the failure of the agreement could be a concern given that G8 has already committed the proceeds of the sale to repayment of a bond in February 2018, plus acquisition of several childcare facilities over the next few years.
At the half-year report G8 had $26 million in cash and $410 million in long-term debt, so it needs the funds to meet its planned expenditure.
A share sale?
One possibility is that the company finds a sophisticated or institutional investor to issue the shares to. It's very unlikely that such a party would agree to pay above-market prices (CFCG was buying shares at $3.88 apiece), and investors would instead likely demand a significant discount to the company's last traded price of $3.45. This would mean substantially less value could be generated for shareholders. Alternatively management may elect not to issue shares at all, and aim to find an alternative solution.
In my opinion, G8 is bumping up against the limits of its 'expansion by acquisition' strategy. With a mountain of debt that it appears to have no intention of paying down, and a determination to continue expanding by issuing shares, the company is increasing its vulnerability just as competition is growing in the industry. Investors would be wise to weigh up the implications of the company's planned announcement next week.
