I have always said there is a price for everything. Having met with Australian Careers Network (ACN, ASX ticker is ACO) this year, I can no longer make that statement. We walked out of a meeting with Managing Director Ivan Brown in September and I told colleague Alvise Peggion we’re not touching the stock, at any price.
Broker Petra Capital had been harassing us for months to take a look at the company. Post its 2015 results, the company was trading at 10 times historical earnings and 6 times forecast earnings, an obvious bargain price for a business growing like wildfire.
Something didn’t smell right, though. Not with the entire VET industry and not with Brown’s Australian Careers Network in particular (VET is short for vocational education and training). The business didn’t exist at the start of 2012. In fact, Brown had only left his job as a policeman in 2009, aged 30. By September 2015, when he and Petra came to visit us, the company was listed on the ASX, had a market capitalisation of $240m and Brown had made his way on to the BRW Young Rich List. All of this with less than $5m in net property, plant and equipment.
We live in the age of unicorns, of course. There is apparently nothing unusual about a thirty-something year old making tens of millions of dollars in a few short years. But this is not some tech startup. It is an old fashioned teacher-to-student education business. And it is completely dependent on the government for its revenue. How does a business like this go from zero to more than $100 million of annualised revenue in three short years?
To provide the backdrop, it all started when the Victorian government tried to reform the vocational education industry. The idea was to save the state money by making the old government Technical and Further Education (TAFE) colleges compete with new entrants from the private sector. Historically students were required to pay around 20% of the cost TAFE course upfront in cash, and the government funded the remaining 80% or so. The reforms the government introduced allowed private colleges to provide TAFE courses, with the government paying the same dollar amount they would have paid TAFE. Crucially, the private colleges were free to charge students what they liked. All you needed was to be a registered training organisation and have a funding agreement.
The idea was to motivate the competitors, and boy did it motivate the private sector. But perhaps not in the way envisaged. Many private colleges worked out they could run these courses profitably with no upfront contribution at all from the student. That made it pretty easy to persuade students to enroll in courses they mightn’t be well suited for, or inspired to actually complete, because after all there was no downside to the student. Student enrollments through the private colleges promptly soared, and allegations of rorting soon surfaced, including shoddy teaching standards, poor course content and even incidents of students being offered free iPads to enroll.
It’s in this environment that ACN had grown so rapidly. And I got a few hints on how it had done so in the meeting with Brown (let’s just say they didn’t increase my confidence levels). But now that the 2015 annual report is out, I can show you how it happened with some numbers.
On 13 January 2015, ACN announced the acquisition of the Phoenix Institute of Australia. Here’s an extract from the announcement:
Fair enough, I guess. Here is a business that has been around for 15 years, providing “holistic counselling and art therapy” courses (what, exactly, is “art therapy”?). It had probably grown slowly and, by the time ACN turned up on the door-step, it was generating $575k of annual earnings before interest and tax. ACN agreed to pay $4.5m, half of which was dependent on future performance.
Note 24 to the 2015 annual report shows us what happened after ACN bought Phoenix:
So they bought Phoenix on the 13th of January. In the period between 1 July 2014 and 13 January 2015, it generated just $1.7m of revenue. In the post-acquisition period, 13 January to 30 June the same year, it generated an astonishing $56m in revenue. Better yet, the profit from that six-month period was almost three times the acquisition price.
Either these guys are the world’s best business operators, or there is something very dodgy going on.
Brown explained to me in September that they had a few more small acquisitions lined up, “each of which was going to add $5m-10m EBITDA to the business”. When I asked why anyone would sell a business for a few million dollars if it was going to make more than that in one year, he explained to me that they aren’t buying businesses, they are buying access to the funding agreements, the agreement that ensures the government will pay them to enrol students. I’m paraphrasing here, but the key comment was that “our large student database allows us to funnel significantly more students down the pipe”.
It finally all clicked into place. They have a massive database of students and a network of brokers who feed them students. ACN goes and buys small businesses that have funding agreements and have been providing courses to a small number of students for years, then they shovel thousands of students into the courses and collect millions of dollars of funding from the government.
Brown maintains the courses and students are all legitimate. State and federal governments and the ACCC all seem to have a different view of the matter. Phoenix has been deregistered as a training organisation, making it ineligible for funding, and the ACCC and Commonwealth have commenced legal proceedings against the company.
Fellow ASX-listed VET company Vocation filed for voluntary administration today, with investors refusing to cough up for a capital raising. And the front page of the Australian suggests these types of companies are going to be shut down for good. Not a minute too soon. Hundreds of millions of dollars of taxpayer money have been wasted, not to mentioned a few hundred million of investor cash to boot.
*ACN co-founder Prakash Charan cashed out in the IPO, collecting $36.55m in a well-timed exit. Ivan Brown sold $2.85m worth in the float, part of which was used to fund broker fees relating to the listing, but kept the rest of his holding.
And worse is the irreperable damage to TAFE colleges many of which now lie in ruins waiting to be sold off.
Great post Steve… But in answer to your rhetorical question -“what is Art Therapy? ” have a look here: https://www.anzata.org/ I’d never heard of it either but it is a legitimate theraputic practice
To save everyone the hassle of clicking the link:
What’s the broker’s interest in this ? Do they get anything out of it or does it just give them street cred if guys you like are on board ?
So, the reason for existence of these companies is not to train students in areas of critical skills shortage, or to provide employment skills to their students; it is to fleece Governments and thus taxpayers. It’s time the whole sector was closed down and the money saved returned to the TAFE sector, where you know the money will mainly be used to provide students with employment skills.
Art therapy: the modern equivalent of basket weaving.
I had 3 shares in VET, so it looks like I’m 36c poorer as a result of their decision to enter VA, which was probably the right decision from all parties.
Shareholders were right to refuse to throw good money after bad, and in the long term they are probably better off for having let it die now rather than bailing out the creditors.
My employer pays for junior staff to undertake a whole range of courses. One of my colleagues was undertaking a course firmly within my area of competence from a private Victorian provider (not sure which one).
Out of interest I asked my colleague if I could see her course materials. I was truly shocked. They were a good 5 years out of date (referred to laws which had been changed) and were just plain wrong. For an $11,000 course it was frankly outrageous.
Steven — this was a very good write up. What is especially troubling is that the rorts within the VET sector have become so well known that some companies are viewing education as a financial solution to fix their struggling entities.
For example; I am not if UCW Limited falls under this umbrella, but this company is morphing from an apparel business into a provider of education — with the intent to becoming re listed on the ASX. Diversification is good but I do not know if diversifying into an industry reliant upon government handouts is a wise move?
The private VET section only exits to make profits for itself and not to educate students. They tick and flick students through fake courses to rake in as much money as possible from the taxpayer.
State governments should not shirk their responsibilities to provide proper accredited education to students. In the TAFE system students are not passed unless they meet their competencies, courses are up to date and are taught by trained teachers.
How will employers know if a potential employer is competent to do any job if they have been to a private VET “college”.
The governments are reaping what they have sewn by outsourcing VET
I would like to assure the readers that these dodgy companies represent only a fifth of the VET industry which includes many small companies like mine which does not operate on taxpayer funds, who work very hard at providing quality training materials that are current and accurate and have a completion rate of over 85% (most of the non-completions are deferrals and completed in the following year).
Calls to close down the whole VET sector because of the bad apples would see many fine trainers and assessors unemployed, employers and individuals with few choices and niche markets without a focus.
When you tar all of us with the same brush you should remember that the majority of the dodgy provides are in Victoria which insisted that there be a national system of governance and refused to take part in it. I have yet to see people howling for the blood of regulators and those who hold the purse strings.
Any money handed out by governments should by accompanied by the type of strict auditing that happens in the UK where providers are expected to be 100% compliant 100% of the time and can be audited without warning.
VET became the new Pink Batts and having almost had my home burn down because of that fiasco I’ll be damned if I will lose the business I have built on reputation and word of mouth for almost two decades because of the bad actions of people I think should be taken out and shot.
I broadly agree with you AB. That bad incentives encourage bad apples to participate should be no surprise to anyone with a cursory understanding of human nature. The main focus now should be on who created the wrong incentives, why, and how to fix it so that only worthwhile players can remain in business. Thanks for your insights.
“dodgy companies represent only a fifth of the VET ” is still a very big number considering one company received fundings in the hundreds of millions.
But the blame is really on governments poor implementation of this plan (as this article reflects), who should also be held accountable to the costs of damages from these dodgy operators.
great article Steve,
get rid of the brokers for a start and what do the regulators think when they read articles like this???
Does this rule adult the adult education industry as an investment option for you then ?
I work inside numerous public and private education provides, as a consultant primarily in the Student Recruitment function and still see a huge opportunity to invest once the fat has been trimmed from the industry.
Not all all, especially now that no one is interested. Right business, right price, some sort of competitive advantage, we would be interested for sure.
I agree with AB, we are a Private Training Organisation and have been operating for 17 years. We have a great reputation and work with some of the countries top businesses. We are certainly not making these big bucks and do not have a VETFEEHelp contract because we can deliver good courses at half the cost charged by those that do have. As for TAFE being all innocent, I read recently that Bendigo TAFE is being investigated for wrong doings similar to this. In addition Linda Mc, we had a young student who had completed a Certificate II in Warehousing at TAFE come to us who did not know how to tape a box so it was secure to pack goods into, so much for students not being passed unless they meet the competencies.
Moral of the story – you cannot tar everyone with the same brush, look beneath the surface of the organisation and see what’s really there.
Thanks for your comments Pat. We didn’t aim to tar everyone with the same brush. Hopefully the state can arrive at a new system that removes the opportunistic gaming and allows good players to thrive and students to get good training. All the best.
Steve, your comment on December 1st that it hasn’t completely scared you away from investing in the VET sector is refreshing. ASH just might be Benjamin Graham’s “cigar butt”….or not.
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