Business Models Part 4: Public Companies - Going public

There are currently no publicly listed nursery chains on a UK stock exchange, since the Creative Education Corporation, trading as Primary Steps, went bust in 2007. Yet three of the ten largest nursery chains are part of, or have links to, plcs. Kiddi Caru is the trading name of The Childcare Corporation, a plc which started as a vehicle for raising funds through individual investors. Bright Horizons trades as a limited company in the UK, but has shares bought and sold daily on the New York Stock Exchange. And Busy Bees, which is now privately owned, was listed on the Australian Securities Exchange in 2007 when it was owned by ABC Learning. The parent company went into liquidation a year later.

In the UK, plcs (public limited companies) can either be listed on a stock exchange, where shares are sold and traded by the public, or are unlisted or privately held (often by another plc). They are also limited liability companies, whereby owners' financial liability is limited.

Philip Blackburn, of market analyst LaingBuisson, thinks it is unusual that there are no UK nursery groups currently UK-listed, but says that without a successful example of a childcare company floating in the UK, flotation is rarely considered as a first choice for those seeking finance.

He adds, 'The stock market exposes businesses to a wide variety of "news", which can shift investor demand, and in childcare there's always news that can tip the applecart one way or another.

'For childcare, solid performing businesses are likely to be better suited long-term to flotation. It's risky for a fledgling business to float to raise capital to grow strongly.

'As a business grows (through acquisition), past experience within childcare suggests it can often be difficult to successfully integrate new nurseries into a business and continue to perform as well as before.'

One example of this is Primary Steps, the first UK nursery chain to float. It began trading on the Alternative Investment Market - the London exchange for small companies - in 2003 with shares valued at 5p under the name Creative Educational Corporation plc. It had dramatic expansion plans, for 50 nurseries by 2005.

In 2007, however, it went into liquidation and 13 of its 27 nurseries closed. Its management team, which included property and finance professionals, cited a failure to 'adequately understand the financial and operational challenges that the integration of the different acquired businesses would have'.

Mr Blackburn adds that Primary Steps failed due to 'poor financial results, pure and simple. There was a series of substantial loss-making years while it was floating, adding to its increasing debt, which meant investors lost confidence, and the company was unable to re-finance its high debt.'

Primary Steps was not the only chain to be publicly listed at the time: Nord Anglia Education, whose Leapfrog Nurseries unit was one of the UK's largest in the 00s, is listed on the FTSE SmallCap index.

In 2007 the company reported an interim loss of £600,000 for its nurseries unit - though Nord Anglia was profitable overall because of success in other divisions, such as international schools. Later that year it sold its 88-strong chain Leapfrog Nurseries to Busy Bees for £31.2m, with the proceeds going to pay down debt.

The EIS model

The Childcare Corporation plc is one of the success stories. It raised a huge £23m through eight different childcare companies between 2002 and 2005, six of which were then merged into a single company of the same name. Since then the company hasn't done any public offerings and is now better known under its brand name, Kiddi Caru.

The companies were a series of Enterprise Investment Schemes (EIS), whereby people can invest large sums of money tax-efficiently, because of the ability to claim income and other tax reliefs. Each year the owners created a new plc and a prospectus detailing the investment opportunities for the public.

Adrian Moore, finance director, says the scheme principally targeted 'high-net-worth individuals with surplus funds to invest'.

He says, 'It was a way to park capital gains tax and inheritance tax. A lot of investors were attracted by the generous tax incentives and the ethical side (of investing in childcare).'

The idea came about through the expertise of company chairman Alan Bentley, who had previously invested in similar schemes and chose to explore the childcare market because childcare was a 'qualifying trade' for an EIS. In its early incarnation, Busy Bees ran the nurseries on the corporation's behalf.

Mr Moore joined in 2002 when the company decided to start managing the nurseries itself. He says, 'The company owes a lot to the model; it helped The Childcare Corporation grow to the size it did.

'Every single one of the 19 nurseries is built and owned by us. Our model is we buy a plot of land and build nurseries on it.

'Paying no rent made setting up a business far easier. Putting up annual rent on 100-place nurseries would be quite expensive each year.'

The company chose not to pay dividends to shareholders and considered creating a marketplace for its shares with a third-party 'market maker', but chose not to as it didn't think shareholders would get a good return, Mr Moore says.

The corporation has now bought back £11m of shares. It has around 630 shareholders remaining, typically investing between £10,000 and £100,000. Staff at manager or deputy manager level are also offered share options at an advantageous price.

Mr Moore is upfront about the cons associated with being a plc.

Despite the associated status and prestige, having more red tape and higher professional fees, such as for annual audits, can be a burden, he acknowledges.

He adds, 'If we want to change anything, we have to seek authority from our shareholders (granting options, for example, requires a general meeting of shareholders), while having a large shareholder base means 'a difference of opinions - maybe some people want to prioritise growth.'

But, he says, 'You can't underestimate the income you need to start a new company. We raised £23m with free capital - with venture capital funding, investors want an annual return.

'Many investments in other EISs haven't fared so well as ours - that is the nature of the investment in a small company.'

Other notable EIS successes have included Nu Nu plc, a ten-strong nursery chain which started out as Downing Nurseries in 2002. It was sold in an £11m deal to nursery chain Just Learning in 2009, which was in turn sold to Busy Bees in 2012.

Listed on a foreign exchange

Busy Bees was on the Australian Securities Exchange when it was owned by ABC Learning, before being sold to Knowledge Universe and most recently the Ontario Teachers' Pension Plan.

John Woodward, founder of Busy Bees, said that the fact of having publicly listed owners made little difference to day-to-day operations. 'ABC just let us get on with it. We were owned by a plc but carried on as if we were a private company.

'ABC had a large business in Australia and the US and, when the parent company went into receivership, the UK business didn't. We were profitable and didn't have any debt. The management team in the UK acted in the best interests of our customers and we were confident we were protected.'

The management team then bought back a chunk of the business.

Woodward said the current owners 'really understand what we are trying to do', which gave him confidence, 'but does this actually make any difference whatsoever? The people who are employed by the company are the most important thing.'

Carole Edmond, managing director of Bright Horizons' UK arm, echoes these sentiments, adding, 'We have been publicly traded and privately held in the past two and a half years and, for our employees ... we would not expect them to see a difference - our goals, mission and ethos have remained the same throughout. When you have a strong vision and clear plan, the technicalities of ownership don't impact the day-to-day operations.'