Street Talk ::

Author: Edited by Anthony Hughes
Date: 21/02/2007
Words: 1642
Source: AFR
Publication: The Financial Review
Section: Market Wrap
Page: 16

Archer linked to ABC's Funtastic bid

A lot has been said about the rise of firms like Pacific Equity Partners and the influx of international players like KKR and CVC Asia Pacific, but Archer Capital, the old Grant Samuel Private Equity, shouldn't be discounted either.

Archer is rumoured to be the party teaming up with Eddy Groves's ABC Learning Centres to buy toy distributor Funtastic.

ABC has an 18 per cent stake in Funtastic (which closed at $1.90 a share yesterday) following a deal to sell its Judius toy arm last year. A 20-year alliance between the two companies means Funtastic rides on the coattails of ABC's global growth rather than relying on supplying the all-powerful department store retailers who could "toy" with Funtastic's margins or go straight to the suppliers.

Archer, which like PEP is said to be looking at another big fund raising later this year, has already bid for Rebel Sport and bought Paradise Foods and 3M Pharmaceuticals Asia Pacific (the latter with Ironbridge Capital) last year.

Ernst & Young Corporate Finance is said to be advising Funtastic, having also advised on the original deal with ABC. But other parties are monitoring the situation and looking at a counter-offer. Pacific Brands is rumoured to have looked at Funtastic last year.

Groves could do a deal whereby he cashes out about half of his (ABC's) equity but retains a meaningful stake such that the destinies of the two companies remain very close.

In the meantime, Groves was still taking some flack yesterday for Monday's results, given concerns about ABC's accounts.

Groves has almost as many detractors as believers. Among the former, some take issue with the company's comments that its 86 per cent rise in earnings before interest, tax, depreciation and amortisation was a great indicator in its own right.

As Clime Asset Management's Roger Montgomery put it yesterday: "In 2002, the company had $27 million of equity and generated $12.1 million in net profits. In 2007, the company may generate a profit of $150 million - a 12-fold increase in profits. Contributed equity in the same period however has risen 59-fold.

"If you give most people 59 times more money, I reckon they could get you pretty impressive profit growth simply by sitting in their rocking chair."

ABC's cash flow statement also showed a sharp fall in its working capital, attributed to revenue timings, the timing of child-care benefits (though this existed previously) and the seasonality of the US business. This doesn't engender confidence but then again, Groves, whose business is now worth close to $3 billion, has been defying the critics for a long time.

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