G8 facing 'Sterling' upgrade

G8 Education (GEM) is making a large step change to earnings as it embarks on what is possibly its biggest corporate transaction yet.

The acquisitive childcare centre operator announced it would acquire Sterling Early Education for $228 million, which will be funded through its cash reserves and debt.

Management have proven to be astute buyers of childcare businesses over the past several years and has always paid a good price that is pegged around four times earnings before interest and tax (EBIT).

However, the acquisition of Sterling is perhaps its most expensive as the offered price represents 5.79 times EBIT.

It is the scale and quality of the centres that have likely tempted G8 to open its wallet wider for Stirling as the transaction will add 91 centres and increase G8’s licensed places by 28.5% to 27,995 places and contribute $39.4 million in EBIT in 2014-15.

Expect broker upgrades even though analysts have priced in a fairly aggressive growth-by-acquisition assumptions. Consensus estimates is “only” forecasting G8’s EBIT line to expand by $19.9 million to $105.4 million in the next financial year.

G8 is in a trading halt and it closed at a record high of $4.76 on Friday. Let’s hope the size and price of the latest acquisition won’t cause any indigestion.