Childcare veteran Chris Scott scaling up Embark Early Education with $25m acquisition

Childcare veteran Chris Scott scaling up Embark Early Education with $25m acquisition

Photo: Markus Spiske via Unsplash

Embark Early Education (ASX: EVO), a Gold Coast-based childcare centre operator led by G8 Education (ASX: GEM) founder Chris Scott, is back on the growth trail after announcing its largest acquisition in three years.

The formerly New Zealand-focused business, previously known as Evolve Education Group, has announced the acquisition of nine childcare centres in Queensland and Victoria for $25.2 million.

The deal boosts the number of centres in the company’s portfolio to 33 as Embark builds on its base in Australia after abandoning the New Zealand market in 2022.

Embark operated 105 childcare New Zealand centres prior to its decision to sell the underperforming business after only buying its first Australian centre in Melbourne a few years earlier in 2019.

Scott, who joined the then Evolve board at the end of 2018 after securing a 19 per cent interest in the company in August that year, has been the force behind the renewed focus on Australia. The plan was accelerated after the Kiwi market struggled to recover from the pandemic.

“New Zealand is a tale of two cities – one of them is Auckland and the other is the rest (of the country),” Scott tells Business News Australia.

“The rest came back from COVID pretty well but in Auckland occupancy was 50 per cent and that’s where we had half of our centres in New Zealand.”

Embark was founded as Evolve Education Group in 2014 by familiar faces in the childcare industry - Greg Kern and Russell Daly of Queensland’s Kern Group who were backed by one-third shareholders Stuart James, a former chairman of Affinity Education Group, and Chris Giufre, whose wife Gabriel was also a former director of Affinity.

Affinity, a one-time takeover target for G8 Education, was acquired by Anchorage Capital Partners in 2015 amid a flurry of interest from private equity in the sector at the time.

Scott stepped in as managing director of Embark in August 2019, looking to shore up his investment in the company with a view to exiting the struggling New Zealand business.

Embark sold the business for NZ$46 million ($43 million) to Anchorage Capital, which looked to jump back into the sector after offloading Affinity Education Group to Quadrant Private Equity a year earlier in 2021.

The sale of the Kiwi assets made Embark a purely Australian company leading Scott to relocate the company to his home turf on the Gold Coast, a move that was made official only last year.

The sale was accompanied by a $53 million capital raising by Embark that Scott says allowed the company to repay $30 million in bank debt and ‘use the rest to buy centres in Australia’.

Childcare industry veteran and G8 Education founder Chris Scott: "I don't think that opportunity is available anymore."

 

The latest acquisition announced this week has significantly boosted the number of Australian centres in the Embark portfolio by more than a third, with the acquisition set to lift annual EBITDA by $6.3 million. Embark posted EBITDA of $17.1 million in calendar 2023, which was up 30 per cent from a year earlier.

The deal comprises five centres in Victoria and four in Queensland, bought from five vendors, which will add 917 licensed places to the Embark portfolio of 2,198 places.

Embark is funding the acquisition from cash reserves and operating cash flow with plans to employ an additional person at its head office to bolster administrative support for the new centres.

However, the scale of the acquisition pales in comparison to Scott’s largest deal of 92 centres when he was managing director of G8 Education.

Scott, who created G8 Education in 2010 through the merger of Early Learning Centres and Payce Childcare, says deals of that scale are harder to come by these days.

“I don’t think that opportunity is available anymore, unless you merge with some of the bigger players,” he says.

Even then, Scott says private equity owners of larger outfits ‘want too much’ for their businesses. Scott should know as Embark exited its New Zealand childcare business at a multiple of 13 times FY21 underlying EBITDA.

The latest acquisitions by Embark are based on an average multiple of four times EBIT, which is the valuation that Scott would religiously adhere to when buying centres for G8 Education.

“Four times EBIT is a coincidence (in this case),” he says. “With some we have paid more than four and others less than four, but the average turned out to be exactly four.”

Profit before tax from the acquisition is expected to be about 20 per cent of revenue, which is a healthy return compared to some of Embark's major competitors.

While Scott, the entrepreneur who two decades ago also founded the $700 million S8 travel business which later merged with BreakFree, is looking to continue growing the Embark portfolio, he knows he has to be patient in the current market.

“It’s hard to find anybody owning a lot of centres as the sector is mainly mums and dads,” he says.

However, Scott is adamant there is one state he won’t be touching - Western Australia, a market that caught him by surprise during his G8 days when the mining boom ended.

Of the 92 centres acquired by the company in its biggest deal, 60 of them were in Perth which suffered a big drop in vacancies during the mining bust.

“Once bitten, twice shy,” says Scott. “It also makes it a lot easier to manage the business from here.”

Despite the challenges, Scott describes the fundamentals of the industry as the best they have ever been.

“There are now 9,000 long daycare centres across Australia and the industry is well supported by the government,” he says, adding that no government would be willing to incur the voter wrath if that support wavered.

Embark this week posted a net profit of $8.27 million for calendar 2023, up from a $2.35 million loss a year earlier,  as revenue surged 16 per cent to $63.12 million.

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