Why the market punished ABC

Talking with share traders last night I was told that ABC Learning stock collapsed yesterday after Business Spectator published the explosive interview with Eddy Groves (KGB interrogation: Eddy Groves, March 6).

I thought the interview would be bullish for the stock because Groves set out that ABC would have no debt when the UK transactions were completed. He was very confident that the Morgan Stanley deal would go through and that the UK sales would be achieved.

But the market read the interview completely differently to me. Groves was critical of some of the events that took place on the fateful Tuesday when much of his stock was sold out. This would have rekindled his unpopularity in the investment community.

But more importantly, he revealed that ABC would manage the US centres and that the private equity deal with Morgan Stanley would expand the US childcare footprint. So while ABC Learning had sold down to 40 per cent of the US operation, Groves revealed that the plan was for the US pie to be much bigger.

Australian share analysts are risk averse and the last thing they wanted to hear was that a leveraged joint venture in the US would expand rapidly, probably taking some of the Australian cash flow. They therefore punished the stock.

If the deal goes through, then the fact that Groves could gain a great price for his US centres while under immense pressure would mean that the analysts have homework to do. Meanwhile, at yesterday's close Groves could buy back his stock if he had the cash.

Footnote: Yesterday I was delighted to see the ASX acting (Short shrift for short sellers, March 6) on my strong views expressed in Business Spectator on the foul practice of superannuation and index funds lending stock to shorters. This Business Spectator campaign was also taken up by the print media. Yesterday's announcement fulfils the undertakings given by the ASX's Eric Mayne in last week's KGB interrogation.