In CMM’s February 2014 issue, the Business Clinic explored speculation around the sale of HC-One to Four Seasons Health Care and whether we would see the return of a huge, market-dominating provider like Southern Cross before its collapse. Speaking to CMM in December 2013 about any potential sale, an HC-One spokesperson said that, ‘We do not expect this process to conclude for several months.’ Eleven months later and a deal has finally been announced although it has not been a smooth process.
A bumpy ride
Sky News reported in August 2014, that the sale of NHP and HC-One was on the verge of collapse with a potential legal threat from Credit Suisse which was trying to protect its investment and secure repayments to bondholders. Bondholders make up a large proportion of NHP’s financial backing and there have been legal challenges over the potential sale and the level of repayment to bondholders.
It appears that the companies resolved the issues surrounding the potential sale as at the beginning of November, NHP announced that a binding agreement to acquire the company had been signed by Formation Capital in partnership with global investment firm, Safanad and Court Cavendish which is the management team of HC-One. The deal is expected to complete in November but was still progressing at time of print.
It was well-documented that NHP had been dealing with its debt and the action taken by bondholders to ensure their return on investment had halted the sale throughout the year.
However, all parties must have been acutely aware of the Care Quality Commission’s increased responsibilities under the Care Act to ensure financial stability in the market. From the 6th April 2015, the regulator will have the responsibility to ensure the financial health of the ‘difficult to replace’ adult social care providers.
The final deal involving Formation Capital, Safanad and Court Cavendish sees NHP, which comprises 275 properties, including those operated by HC-One, acquired for £477million. The company announced that this brings total recoveries to its creditors to £507million over the last five years.
NHP stated that, ‘The sale of the portfolio and underlying business brings to an end one of the most difficult business rescues and turnarounds in the history of the UK health and social care sector.’
The new partnership comprises Formation Capital, Safanad and Court Cavendish. Only one of these names will be familiar to the majority of the sector in the UK, Court Cavendish.
Owned and operated by Dr Chai Patel, formerly owner of the Priory Group, Court Cavendish was re-established to deliver operational and financial turnarounds of multi-site social care and health care organisations.
It joined up with care home landlord NHP in 2011 to operate the majority of the NHP-owned Southern Cross portfolio when the provider collapsed. Together with a very experienced management team the companies formed HC-One and set about turning around the portfolio.
Formation Capital is an experienced investor in the US market, specialising in ‘seniors housing and care, post-acute and health care real estate investments’. It is chaired by Arnold Whitman who has an extensive career in investing in the elderly housing and care market in the US. The company actively acquires health and care properties in the US and has an ongoing partnership with Safanad, the third player in the NHP acquisition partnership.
Safanad is a global principal investment firm that invests in real estate, private equity and public markets. It has a specific focus on healthcare investments along with education, financial services and retail. Safanad and Formation Capital have acquired over $3billion in elderly care assets since it began its strategic partnership in 2009.
The partnership between Formation Capital, Safanad and Court Cavendish intends to consolidate HC-One’s transformation of the business, which is now reported to have above average occupancy levels.
Plans for HC-One include acquisition of further homes and to diversify the portfolio further to offer the full range of social care services including retirement villages, care and nursing homes plus home care. It is hoped this will make the company, ‘an integrated health and social care provider working in collaboration with public sector commissioners to deliver high quality and cost-effective services.’
With the deal and the end of the uncertainty over the future funding of HC-One, it is hoped that residents and their families will be experiencing ‘a new era’ as the new owners focus on investing further to continue driving the business forward. Also this new financial stability should help to stabilise the market further.
Over to the experts…
With the sale of NHP and HC-One having been lengthy, challenging and, at times, embroiled in legal challenges, there must be a sense of relief at this final acquisition. With it due to complete this in November, does this draw to an end the hangover of the Southern Cross collapse? What does the acquisition mean for the market, HC-One and its residents? With the Care Act bringing with it regulatory responsibilities to ensure the financial health of larger providers will this deal bring much-needed stability to
The shadow of Southern Cross will remain
Derek Breingan BA (Acc) MCIBS, Head of Healthcare Sector UK, Clydesdale Bank Plc and Yorkshire Bank Plc
This transaction, thankfully, ends months of speculation about the future and wellbeing of HC-One and, hopefully, will allow the new investors to focus on the core business and continue to invest and improve the portfolio it has acquired. Residents and families will expect to see early evidence of the intentions of the new owners. The rescue of Southern Cross remains a remarkable achievement by those involved given the size and geographical spread of the group, and indeed its financial position at that time. The size and structure was, in some ways, the source of the problems it faced, but could also be argued as a catalyst to its ultimate successful rescue.
Whilst this deal does bring a welcome level of stability, and removes a degree of uncertainty to those involved in HC-One, the shadow of Southern Cross will remain over the sector for some time. The Care Quality Commission (CQC) seeking to judge the financial well-being of the main providers in the industry provides tangible evidence of this. This will put significant pressure on the CQC to ensure it audits as robustly and thoroughly as possible.
The financial pressures on the sector remain in relation to occupancy levels, average fees, rising costs, including staff and utilities, and in many cases ongoing debt obligations. However, this has not prevented continued investment from overseas funds, with heightened deal activity an ongoing feature of the market. That does bring confidence to the sector and large groups will remain an attractive investment.
The outlook for the care home sector is broadly a positive one, but there is no question that the Government and regulator will be monitoring the care landscape carefully as it tries to prevent another Southern Cross sized collapse, which would damage an important industry which is steadily recovering.
The concern is to ensure stability
John May, Managing Partner, Freeths LLP
Any step towards certainty about the future has to be positive for investors, local authorities, employees, care home residents and their relatives alike. We hope this acquisition has a wider calming economic impact. The collapse of Southern Cross after rapid expansion highlights that income growth assumptions require regular checks; particularly at a time when the NHS and other public sector bodies are under pressure to make year on year efficiencies.
As envisaged by the Care Act, efficiencies and service quality improvements are achievable through integrating care pathways. The market needs to be competitive and open to new entrants. With an ageing population there is real growth potential and opportunities as the NHS rationalises its estate.
Fundamentally, the concern is to ensure stability, avoiding short-term gains for bondholders potentially at the expense of the tax-payer and the vulnerable. Competitive pricing must not lead to lowering of standards. This is a market where attention to the delivery of high standards of care, by well-trained staff, knowledgeable about their responsibilities is critical. Particularly with new CQC standards, a statutory duty of candour and duty to meet fit and proper person requirements.
We recognise the concerns of our colleagues in the health and care sector of the costs of ensuring compliance with the CQC and other regulatory standards, alongside managing the damage to the sector’s reputation caused by the collapse of Southern Cross and others; and the revelations of the Mid Staffordshire and Winterbourne enquiries. In my opinion, the way forward has to focus on using lawyers with knowledge of the risk management regulatory compliance issues to reduce likelihood of future crisis and collapse. This is how we are working to support our clients: it is a case of looking to be wise before the event.
There is no question that it is good news
Tim Edghill, European Director and UK Head of M&A, JLL Corporate Finance Ltd
As a member of the seven man restructure committee of Southern Cross, the impact of what was a very public and emotive process for residents and families, the sector, Government, media and the general public was plain to see. The sale of NHP/ HC-One, almost exactly three years after the business took back control of its homes from the beleaguered Southern Cross, is an important step forward, lifting its debt burden and providing vital funding for the future.
This joint venture by Formation Capital and Safanad, entering the UK market for the first time, brings another exciting new source of capital. Furthermore the involvement of HCP, the US specialist healthcare REIT, who has provided debt to the transaction, further demonstrates the breadth of new sources and types of capital helping to revitalise and develop the sector.
As a third of the portfolio, this recapitalisation is a major step in laying to rest the impact of Southern Cross’ failure, however a broader legacy remains in the elderly care sector as a whole. A significant debt burden remains in many portfolios or corporately with owner/operator businesses at a time of reducing margins driven by economic, legislative and regulatory pressures.
There is no question that this transaction is good news for HC-One and its employees, its residents and their families and for the sector. Healthcare as a sector (and elderly care in particular) still has challenges ahead in an age of continued funding shortages and increasing demand and acuity. Nevertheless, transactions such as this and the significant amount of funding and recapitalisation work we are involved with will continue to benefit and have a positive impact on the sector. As innovation increases and more capital flows are realised, the potential for the sector to provide for the care needs of tomorrow also increases, which is an exciting prospect for the next few years.