Business Clinic
Care UK refocuses services

May 2015 saw Care UK take big steps to refocus its services. Having sold its mental health and learning disability services in the space of a fortnight, by 1st June it had also confirmed the sale of its domiciliary care services. Our panel discuss what this means for the market.

Care UK is the largest independent provider of health and social care in the market with services spanning NHS healthcare, care homes, homecare, mental health and learning disability services. The company states that, ‘one in four people living in the UK is supported by one of our services’.

Healthcare

Operating within healthcare, Care UK provides a range of services to NHS patients. The company provides 50 NHS primary care services including GP and walk-in services. It delivers 19 NHS out of hours’ services, providing health advice and support for over 10 million people. It operates 10 hospitals that specialise in elective, planned surgery. In the past year, its treatment centres and clinical assessment services have delivered over 70,000 procedures for NHS patients.

Care UK also has 13 NHS 111 services that deal with, on average, 185,000 calls a month. These services cover a population of over 8m people. It is also the largest provider of health for offenders with services delivered at 12 different sites.

Social care

As a social care provider, up until recently, Care UK supported older people, those with mental health conditions and people with learning disabilities in both residential and community-based settings.
It manages 114 care homes with over 7,000 places and runs 13 day care centres. The company provided over 150,000 hours of homecare every week to more than 13,000 people as well as having 18 extra care schemes.
Up until the refocus, Care UK also supported over 800 people with learning disabilities including 18 residential care services and had 20 mental health services.

Strategic review

The company has been steadily growing its healthcare services, residential and nursing care homes. It has developed 18 new care facilities in the past two and a half years, and has 15 more in the pipeline for the next three years. The company has a re-provisioning contract with Suffolk County Council which has seen it invest £60m in ten new care homes and ten day centres in the county.

The company’s Q1 2015 financial results in February identified that both residential care and healthcare were performing well, whereas community services were down. Residential care’s revenue increased 10.2% (+£5.6m) to £60.5m in the first quarter of 2015. Healthcare had a consistent year-on-year performance with revenue increase of £0.5m to £94.5m. In community services, revenue of £29.7m was down £1.1m on the previous year.

Within the same results, the company set out that it had commenced plans for a strategic review of its community services including mental health, learning disability and homecare. Mike Parish, Chief Executive of Care UK, explained the drivers behind this review to CMM, ‘We wanted to review and refocus our portfolio – which has been for some time the broadest in the care sector – in a positive way, balancing the future health of individual services and the strategy of the Group as a whole.

‘I think Care UK has been extremely effective in growing and developing services, not just in commercial terms, but through innovation and the introduction of more flexible and less institutional care models. Our judgement is that in very challenging markets, services are, in the long-term, best served by being part of organisations which are sector leaders or which are seeking to grow and potentially become market leaders in particular areas.

‘Care UK is a strong market leader in our NHS elective procedures, in health services within the justice system and in NHS urgent care through GP out-of-hours services and the NHS 111 telephone service, and we’re progressing the most ambitious programme of new residential and nursing homes. Our view was that there may well be better options for some of our other services such as those for people with a learning disability or mental health condition, and we think that progress so far has proved this to be the case.’

Acquisitions

The strategic review culminated in the sale of both the mental health and learning disability divisions within two weeks of each other in May, with the sale of its homecare division confirmed on 1st June. On the 5th May 2015, Care UK announced that its mental health services were to be acquired by Partnerships in Care, with completion expected for 1st June. The acquisition of Care UK’s 20 mental health services will add to Partnerships in Care’s secure and step-down services.

This was followed closely by an announcement on 18th May that its learning disability services had been acquired by Lifeways.

The last part of the refocusing jigsaw is the domiciliary care division, which was sold two weeks later. On 1st June, the company released details of the division’s sale to Mears. Overall, the three transactions have realised £130m (before fees and expenses) from services representing a combined annual EBITDA of £12.9m for the preceding year. Following the refocus, Care UK remains one of the leading health and social care providers in the UK with an annual revenue base of £600 million.

Looking forward

With these divisions disposed of, Care UK will be in the position to move forward focusing on its strengths. Mike Parish continued, ‘We’ll emerge from the process with a more focused portfolio, built on strong performance and market positions, which continues to span both health and social care. The ability to engage with commissioner needs in both sectors and to apply learning to both design and delivery of more joined-up services remains crucial. There are very big challenges ahead for commissioners, and both they and providers need to be able to work to be more radical and to bring about the fundamental change the health and social care sectors require.’

Over to the experts…

Is this the beginning of the end for diverse portfolios? Is there still a business model in providing a broad range of services? Is Care UK’s refocus a logical step in a market that is driving forward with service integration? What does this say about the future of the market?

Managing quality and risk

It is interesting to see that across our portfolio of accounts and tax clients and the businesses we have been advising through to exit, there is no single trend appearing. We have seen businesses of various sizes expand their spectrum of care provision or, alternatively, rationalise their provision by selling off either ‘non-core’ or diversified areas of the business that they prefer not to continue with.

There are three key factors in determining the strategy for these operators. Firstly, customer relationships; quite often smaller businesses that have very good, but fairly localised relationships with funding authorities, are being asked to expand their care pathways to meet known demand. Often when working with more than a small number of funding authorities, the relationships can become diluted and care pathway opportunities reduced.

A second concern can be management, some businesses can become stretched operationally when widening service offerings. This is particularly true for SMEs which are still, in the main run by owner/operators. As businesses grow, they are more likely to have the critical mass to employ resources to manage diversified provision, but preventing a ‘silo effect’ can be difficult.

Finally, there is the issue of the exit route or maximisation of shareholder value. Whilst certain multi-care provision businesses will be attractive to a small number of buyers, we have found that buyers/investors would prefer a distinct acquisition target, for example residential learning disability rather than residential learning disability plus mental health.

Overall our view is that Care UK’s rationalisation does not necessarily signify the beginning of a trend, and each business will make its decisions on its own circumstances rather than a general market direction.

John Lucas Partner, Hazlewoods LLP

A natural part of a business’ lifecycle

Care UK has one of the most diverse range of healthcare interests which in the past has been seen as a real strength ensuring that it wasn’t dependent on one sub-sector. The move to re-focus appears a natural part of a business’ life cycle. At the turn of the last century we saw the growth of the industrial conglomerates which were built up with different businesses only then to be broken up. Therefore, it comes as no surprise that Care UK has decided to refocus its services on areas that have performed well and look to have growth prospects which in turn will enable Bridgepoint to extract maximum value when it decides to sell the business. The timing of the sales looks sensible as we’ve seen good demand for these types of assets.

As Care UK grew, managing such a diverse portfolio of companies was always likely to be a challenge. Each division would need to be run as separate businesses. By streamlining the business, management structures will be simpler although no less challenging in the current market. It does however allow management to spend their precious time on the areas that can deliver best value. It is often seen that poorer performing parts of a business take a disproportionate amount of management time – a situation Care UK are addressing by disposing of the three businesses.

As healthcare businesses grow any economies of scale are lost. Back office costs can be saved however as businesses get bigger more management time is required to ensure quality and the caring culture is maintained. By refocusing their services Care UK should be able to continue to drive up quality in its remaining services which in turn will make it a more stable and robust business.

Paul Birley Head of Public Sector and Healthcare, Barclays

A re-focus through greater specialisation

I see this as a re-focus through greater specialisation. For example, instead of providing elderly care and mental health, there might be a move to a range of mental health care services segmented into areas of need such as eating disorders, autism, acquired brain injury, Huntingdon’s, etc. This change is clearly being influenced by service users and commissioners seeking more specialised care delivery in their quest for better outcomes and at an economically viable price.

The argument for having breadth of services for the sake of scale or diversity is diminishing. Margins in the care at home market have been under pressure as a result of local authority funding reductions and this is driving the need for economies of scale achieved through focus on specialist areas.

I believe this is a logical step for Care UK. The market is so large, that any operator attempting to provide an integrated offering across many sectors could be perceived as trying to be all things to all people and lacking in credibility relative to more focused ‘specialist’ competitors. This presents a platform for insurgents to both grow and enter the market, with better and more focused offerings.

The message here is that whilst there is growth in the whole market, the combined pressures of higher expectations and public sector funding cuts compel operators to examine where best to spend their capital and management resource. The strategy of disposing of noncore elements of your business, where you are not a market leader and don’t have the potential to be, is not a new one and has been seen in many different industry sectors previously. Rolls Royce selling its energy division to Siemens being just one recent example.

Roger Harcourt Partner, Shakespeares

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