Friday, 22 March 2013

Reflections After the Care Show- How is the Healthcare Market shaping up for 2013?

A common question I was asked over the two days at the Care Show in Bournemouth was how the Healthcare market was comparing against other sectors, and the forecast for M&A in Healthcare for 2013. 

When selling your business UK Healthcare remains a desirable market due to the continuing demographics of the UK, and the opportunities that remain within the industry for growth in conjunction with offering a high quality service to clients, though there are several areas of potential concern for Healthcare owners and those considering investing in the industry.

The first is that if your Care Home or Home Care Agency is reliant on Local Authority work, namely receiving referrals from the local Councils to ensure your Home is running at full occupancy or that you have sufficient Domiciliary Care clients to remain profitable, then your Company is only as good as your relationship with the Local Authority and only as profitable as the Charge Rates the Local Authority is willing to offer.  Numerous Healthcare Owners whom I have met over the last few years have told me of the increasing pressures they are receiving from Local Authorities to reduce Charge Rates whilst offering the same level of service.  Putting this into simple Accountancy terms on your Company’s Profit & Loss this means for every £ taken off the Charge Rate and in effect your Turnover, this drops straight off your bottom line profit.  This ultimately squeezes the margins that you are working on, and brings into question whether the historic quality levels can be maintained, or whether the Company will need to reduce the level of service clients have grown accustomed to receiving in order to remain in business.  These are issues which rightly concern CQC and Business Owners alike, and why more and more Vendors are proactively looking to expand into the Private market.

The second point is relating to the short term attractiveness of the Healthcare sector, when compared to other external industries or even on a regionalised basis within the Care industry.  It is common at present for different Local Authorities to offer different Charge Rates for exactly the same service, resulting in Companies being able to achieve variances of over £10 an hour in different parts of the Country.  Considering an external Investors criteria for one moment, would you be more drawn to acquire a Company in a higher Charge Rate area, or one that offered exactly the same type of care, required the same effort, time and work, but would ultimately be 30-40% less profitable?  The main criteria of Acquirers when assessing a Healthcare opportunity are quality and profit; if one of these is significantly below the average then the interest, along with the value, will diminish accordingly.  The other aspect is to assess the attractiveness in the short to medium term for external investors when comparing the Healthcare industry to other sectors such as IT or Oil & Gas.  With the well documented Government agenda to reduce Public spending, and Healthcare seen as one area where cost savings can be made, Investors are reviewing and calculating quicker return on investments being made from these ‘recession proof’ sectors.  This reduces the number of external parties acquiring into the market, and as demand reduces, so does the values achieved within the market.

There were a few highlights in the Healthcare M&A world in 2012, notably the acquisition of Harmoni by Care UK and Enara by Mitie, the latter hopefully the instigator of Facilities Management Companies looking to broaden into the Healthcare market in 2013.  However the main issue holding back the number of M&A deals to pre-2008 levels remains funding.  Over the two days of the show I spoke with numerous Bank Managers for all the main high street lenders, and the story was the same for all, one of cautious optimism for the sector, an understanding of the restrictions preventing the release of equity, but ultimately a sense that their hands would be tied for some years.  This leads to an issue whereby individuals who have worked within the Care sector for numerous years, who are driven by ensuring quality levels are high and wish to go alone and branch out for themselves come up against a brick wall when attempting to secure funds, and as a ‘first time buyer’, with limited assets, Banks require this individual to raise personally anywhere up to 65% of the total consideration.  In today’s climate this is unrealistic, and therefore means the number of ‘care people’ becoming owners is reducing year on year.  This void is filled by Venture Capitalists, Private Equity Firms and Investment Consortiums on ‘buy and build’ strategies; however their focus is on maximising profits, not necessarily on improving care quality.

So in summary the Healthcare sector at present remains a sector of great interest to Purchasers, offering potentially high levels of return and in one of the few markets where predictions of growth for the next 10-20 years can be justified.  However in the short term, with the memory of a recession still in the back of people’s minds, and the continued sluggish nature of the economy and continued government cutbacks, the sector is on a knife edge.  If you are selling your business UK Care Purchasers and the M&A market in general are continuing to tread with caution until these concerns are alleviated.

Adam Croft, Senior Business Broker