Why ABC Learning boss Eddy Groves had to go

The longer embattled childcare group ABC Learning Centres stayed in a trading halt, the more certain it became that the ABC board would get rid of the company’s founder, chief executive and figurehead, Eddy Groves.

ABC’s shares have been suspended since August 21 pending the release of the company’s 2007-08 accounts. Those results should have been announced to the market by August 31, but have been delayed by Ernst & Young auditor Brian Long, who has spent the last month pouring over ABC accounts from 2007-08 and fiscal 2006 and 2007.

When ABC finally gets around the announcing its accounts – it had promised to do so by September 30 – it is expected to restate its accounts for the past three years and it almost certain that the company will post a huge loss for 2007-08.

There is simply no way Eddy could front the market and the media to deliver the results and revised accounts and say, effectively, ‘Whoops, I guess I got this wrong’.

ABC’s major investors, led by Morgan Stanley Private Equity Asia, Lazard Asset Management and Singaporean group Temasek Holdings, could not allow the company’s already shattered credibility to take another blow.

They voiced their displeasure to ABC chairman David Ryan – ironically, the former chair of ABC’s audit committee – who in turn informed Eddy. ABC insiders say Groves then jumped, but only moments before he would have been pushed.

Many will wonder why Ryan didn’t get rid of Groves sooner. Since the start of the year, the company’s share price has fallen from $5.18 to just 54c, destroying $2.5 billion of shareholder wealth. Groves and his wife Le Neve – who also resigned today – lost the majority of their shares in late February, when a sharp fall in the company’s share price forced them to sell their holdings to meet margin calls.

The string of writedowns and restatements and revisions ABC has made to its accounts since the start of the year surely provided Ryan with enough reasons to cut Eddy loose.

But for the past six months, Eddy has insisted he was the man who knew the company inside and out and could lead it out of trouble. To underline his dedication to the cause, Eddy even struck a deal with Ryan to forfeit his 2008-09 salary in return for 1.5% of the shares in the company.

But Ryan and his board – with the help of some prodding from shareholders – have finally seen the folly of Eddy’s “best man for the job” argument. And rightly so – Eddy’s time has passed.

Ever since he bought his first milk run at the age of 19, Eddy has been an entrepreneur: great at creating a vision, an aggressive dealmaker and extraordinarily passionate about his company.

But as the problems with ABC’s accounts show, Eddy’s eye for detail was not good enough. In the current risk-adverse climate, entrepreneurial types are on the outer. Investors want steady, conservative leaders who will focus on operations, cost reduction and maximising profit.

With this in mind, ABC has turned to Rowan Webb, the former chief executive of Brisbane-based clothing company, Colorado Group. In its stock exchange announcement introducing Webb, ABC highlighted “low gearing, conservative balance sheet management and cash surpluses” as the hallmarks of Webb’s time at Colorado – exactly the sorts of things David Ryan and the ABC board need to focus on. Webb has 12 month contract with ABC, with a one month notice period.

The Australian business world will be a little bit more boring because of the departure of Eddy Groves and his maverick image – the fast cars, the cowboy boots, the basketball team and, of course, the mullet hairstyle.

But in the end, the way Eddy’s larger-than-life image was just too closely linked to ABC’s fortunes. For the company to move forward, Eddy had to go.