G8 Education has withdrawn from bidding for target Affinity Education after rival Anchorage Capital Partners increased its proposal from 90c to 92c per share. G8 made an 80c offer in August
G8 has also agreed to sell its 19.89% stake in Affinity and will book a gross profit of about $9m on the sale of its shares. However the company did raise SG$155m (~A$155) in one year unsecured notes at 3.5% to support its cash offer. These notes will therefore remain outstanding with no benefit from acquisition income, paying interest of approximately $1.8m until the first optional redemption date of 30 November 2015.
As previously noted it is likely that G8 will use an increasing proportion of debt to fund acquisitions to keep delivering shareholder growth. If debt levels increase without sufficient growth in earnings, this will weaken G8’s credit profile. The company may also potentially pay higher acquisition multiples than historically with the offer for Affinity a good example. At current levels G8 bonds look fair value noting the credit profile will likely continue to weaken but remain manageable.