Catalyst Healthcare Services 2012

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An ageing population and significant public funding pressures means that the private sector is becoming more involved in delivering healthcare services. Our Autumn 2012 Healthcare Services industry sector note outlines key issues and pressures within the healthcare services supply chain and analyses the impact on M&A.

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Catalyst Healthcare Services 2012

  1. 1. Healthcare Services Sector M&A update Autumn 2012£20 billion opportunity ahead for the private sectorAn ageing population and significant public fundingpressures means that the private sector is becoming moreinvolved in delivering healthcare services. This is leadingto increased M&A activity.Key observations Trade buyers have renewed capacity for acquisitions. Stronger balance sheets are allowing management teams to refocus on growth and, with shareholders now more willing to sell than in 2009-2011, this is leading to an increase in M&A. The deal process can be lengthy, complex and due “The fundamentals in healthcare diligence potentially extensive. However, with the right preparation, services are strong and there is a vendors can achieve fair valuations and complete transactions. real opportunity in primary and Mid-market and specialist private equity houses continue to invest. secondary care for private The private healthcare sector, a large element of which is owned by private providers” equity, dominates delivery of the highly fragmented specialist and domiciliary Justin Crowther, Director care sector. Private equity continues to grow businesses in these sectors whilst also looking for new platforms. Overseas institutional investors are acquiring UK assets. Leading pension funds are attracted to healthcare businesses that have scale and stable cash flows, as demonstrated by Ontario Municipal Employees Retirement System’s acquisition of Lifeways from August Equity. Significant opportunity for the private sector in primary and secondary care. The introduction of GP commissioning and interest in healthcare models offering alternatives to hospital care will require a higher proportion of services to be delivered by the private sector. The markets for these services are estimated to be worth around £20 billion. Catalyst Corporate Finance LLP 2012 Landmark contracts awarded to Circle, Virgin Care and Serco demonstrates increasing recognition from the public sector that leveraging the private sector’s ability to invest capital and use more efficient delivery models is necessary for the government to reduce costs while improving the quality of healthcare.
  2. 2. Healthcare Services Sector M&A updateTrade buyers need to M&A activity Guidance on the deal grow market share increasing process: be prepared Acquisitions back on the Our experience of acting for both strategic agenda buyers and sellers in the healthcare Deal activity, especially amongst larger sector is that the deal process can be corporates, has picked up since mid-2011. lengthy and due diligence potentially With balance sheets repaired, equity extensive and complex. Vendors need positions reset or restructuring transactions to ensure they are well prepared. Key completed, management teams are now areas to focus on include: able to focus on growth and acquisitions Developing a detailed understanding are back on their agendas. of historical and future financial Notable recent deals include Voyage performance Healthcare’s acquisition of Solor Care Understanding and presenting and Saga’s acquisitions of Allied and appropriate KPIs Nestor. Saga is now the largest domiciliary care provider in the UK. Understanding property and lease Other operators such as Four Seasons agreements and Care UK now have the resources and desire to expand their offering, Reviewing compliance history, as illustrated by Care UK’s recent policies and procedures acquisition of Whitwood Care. Understanding and presenting key Acquisition drivers include market share customer relationships, growth and expansion from a regional opportunities and fee discussions to a national offering. Healthcare Demonstrating quality of outcomes services markets remain highly fragmented, especially the specialist and domiciliary care market. For High level of private equity and example, post the acquisition of Solor institutional investor interest Care, Voyage Healthcare will have a market share of around just two per Private equity investors continue to invest in cent. Acquisitions also allow operators the sector convinced by its strong long-term to protect margins through economies dynamics, especially the homecare/ of scale. domiciliary sector. Since 2009, 40% of overall transactions have been in this asset Buyers are looking for evidence of lite sector (see Figure 1). resilient trading, robust internal systems and compliance, and are focusing on For those businesses that can deliver the viability of forward forecasts and exceptional outcomes for users of services strength of customer relationships. whilst implementing efficiencies and being competitive on costs, there are The number of businesses embarking opportunities to create scalable and PE attracted to on sales processes has increased in valuable businesses across the sector. Catalyst Corporate Finance LLP 2012 2012. Private vendors are more sector’s long-term predisposed to selling than in 2009- Activity has been led by three types of investors: dynamics 2011. Some have moderated their price expectations and recognise that Sector focused houses which continue valuations of 6-8x EBITDA represent to invest in new platforms while sensible value. consolidating existing ones. August Equity-backed Enara have made a series of multiple bolt-on acquisitions to2
  3. 3. Healthcare Services Sector M&A update help it become one of the largest providers of domiciliary care in the Institutional investors South of England. ISIS Private Equity “Managing healthcare services has acquired Independent Community businesses is all about focusing on attracted to strong Care Management. These deals are the detail, creating strong teams cash flows less reliant on bank funding, which and having best-in-class historically have leveraged property- backed assets. procedures. We turned around an underperforming business and Mid-market funds acquiring maturing there was a strategic logic to the platforms such as Graphite Capital’s acquisition of National Fostering Agency deal with Voyage” from Sovereign, or investing in sizeable Kit Doleman, Ex-Chief executive, Solor Care businesses with strong market positions, for example, Advent’s combination of Craegmoor and Private equity investors looking The Priory Group. for exit opportunities PE-backed exit Large UK and overseas institutional Over the last three years M&A activity activity to increase funds are attracted to non-cyclical has returned to the volumes experienced businesses that have scale and strong between 2002 and 2005 (see Figure 2). cash flows. For example, Bridgepoint’s We expect the number of exits to acquisition of Care UK, Canadian accelerate as investors take advantage pension fund Ontario Teachers’ of the more favourable M&A environment Pension Plan’s acquisition of Acorn to bring investments made pre-2010 to and OMERS’ acquisition of Lifeways market. from August Equity.The public markets remain difficult forhealthcare service businesses. Perceivedreputational risk (heightened by theSouthern Cross implosion) has deterredinvestors. We do not see this lack ofappetite changing in the short tomedium term. Figure 1: Over 40% of M&A since Figure 2: Activity is returning to 2009 has been in the domiciliary pre-downturn levels care sector UK deal volume since 2002 M&A activity since 2009 by healthcare sector 152 33 138 130 26 24 92 19 18 80 Catalyst Corporate Finance LLP 2012 16 76 14 68 63 61 11 11 9 45 8 7 6 6 40 5 4 4 4 3 3 3 3 3 2 2 2 2 1 YTD 2012* 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2009 2010 2011 YTD 2012* Primary Care Secondary care Domcare Elderly Specialist Childcare OtherSource: Corpfin, Catalyst Corporate Finance. Source: Corpfin, Catalyst Corporate Finance.*August 2012 *August 2012 3
  4. 4. Healthcare Services Sector M&A update Opportunities in Primary and secondary care: the next big primary care, opportunity for private providers community health The private sector currently delivers a very and commissioning small proportion of primary and secondary Figure 3: Private sector should care (see Figure 3). However, if the increase its share of primary and government is to manage funding pressures and achieve improved outcomes for secondary care by 2020 patients this will need to increase. Proportion of UK public health and social care The government will need to access the delivered by private sector capital investment potential of the private Private sector already dominates delivery sector and make use of alternative models 100% Delivery by private sector of healthcare delivery which focus on the forecast to increase to 80% between 20% and 40% community and home and away from 60% hospital care. This is an opportunity for 40% financial investors to invest in the earliest 20% stages of this shift. 0% Primary Acute/ Elderly Domicillary MH & LD Areas such as primary care, community Care secondary Care & PD health services and commissioning support % delivered by private sector today % delivered by private sector 2020 services are potentially worth billions of pounds: Source: Department of Health, Catalyst Corporate Finance Primary care: The NHS spent £8.3 billion on GP services in England in 2009-2010, currently dominated by small general practices. However, operators such as multi-practice groups like The Practice or Virgin Care are growing and private providers are estimated to be generating annual revenues of £185 million, currently 2.2% of the addressable market.* Nevertheless, there are significant challenges to increased penetration, fundamentally around ownership “Since 2006 we have treated two structure and access to pension and a half million NHS patients, entitlements. offering improved accessibility, Community Health Services: Moving convenience and most importantly Private sector secondary healthcare services into delivering improved health starting to deliver community-based settings is estimated outcomes - providing good value to be worth £8-£8.5 billion in England.* for the NHS” secondary We believe the private sector could Bart Johnson, Chief executive, Virgin Care deliver up to 20%, or around £2 billion, healthcare services Catalyst Corporate Finance LLP 2012 by 2020. Signs that the private sector is being recognised as capable of delivering Other specialist services like pathology services in this area are apparent with are also in focus. South West Pathology major contract wins by Circle, Virgin Services (the joint venture between Taunton Care and Serco worth over £700 million and Somerset and Yeovil NHS Foundation (see Figure 4). Trusts and Integrated Pathology4
  5. 5. Healthcare Services Sector M&A updatePartnerships, founded by Sodexo andLabco) and NHS Midlands and East’s Locally-accessibletender for a five-year £500 million contractwhich is open to private providers, are specialist services toexamples of the restructuring of pathology grow significantlyservices into efficient, scalable networks. Commissioning support services: From April 2013, Clinical Commissioning Groups (CCGs) will assume responsibility for £80 billion “Reforms across the NHS combined of NHS services in England and will with the need for greater efficiencies start buying commissioning support represent increased opportunities for services worth an estimated £1.3 billion.* the private sector to provide more NHS funded services. The desire toWith further regulation and guidance move services from acute hospitalsrelating to commissioning expected overthe coming months, the impact of the into the community (often linked withHealth & Social Care Act on procurement, using the Any Qualified Providerdelivery channels and models is unclear. model), increased use of the privateNevertheless, the role of the private sector sector in joint ventures/outsourcingis increasing. If this is combined with theremoval of barriers to higher participation, for services such as pathologysuch as in primary care removing practice and the potential to provideboundaries and goodwill on GP practices, commissioning support services toinvestment would be boosted and the CCGs are just some examples”opportunity for the private sector to build Robert Breedon, Partner, Wragge & Cobusiness with scale will be considerable. Figure 4: Private and public sectors working together: major healthcare contracts have been awarded to the private sector during 2012 In February 2012 Circle became the first ever non-state Circle has reported productivity gains and increased provider to deliver a full range of NHS district general patient satisfaction at Hinchingbrooke and the hospital services as part of a ten-year contract to run day-surgery hospitals it operates in Nottingham. Hinchingbrooke Healthcare NHS Trust. However, this business model is young and yet to show evidence of profit generation. Hinchingbrooke staff will continue to be employed by the NHS, retaining their NHS terms and conditions including their NHS pension. In March 2012 Richard Branson’s Virgin Care was awarded Virgin Care under the agreement and retained their a £500 million five-year contract by NHS Surrey to deliver employment terms and conditions, including access to the Catalyst Corporate Finance LLP 2012 community health services in South West and North West NHS pension scheme. Virgin Care is the preferred bidder for Surrey, and other services (such as sexual and prison a £130 million contract to provide a range of core NHS and health) across Surrey. Some 2,500 staff transferred to social care services for children in Devon. In March 2012 Serco was awarded a three-year £140 for supplying to the public sector to take advantage of the million contract to provide community health services for opportunity to expand into the healthcare services market. NHS Suffolk. Serco is an example of a company from a Staff will transfer to Serco under TUPE and should remain different sector (facilities management) using its reputation in the NHS pension scheme.* Source: Laing & Buisson Primary Care and Out of Hospital Services UK Market Report 2011/12 5
  6. 6. Healthcare Services Sector M&A update M&A activity will Prospects for M&A: our predictions remain buoyant The dynamics discussed above mean that the sector is positioned for further M&A during the next 18 months. Specifically, we expect to see: Further investment from private equity. This will focus on new platforms and existing portfolio investments. The pace of exits increasing. Driven by platform investments made before 2010 seeking exits, vendors’ moderated price expectations and corporate acquirers returning to the market. Businesses from other sectors will look to enter the market. Companies from sectors such as facilities management will try to enter or further penetrate the market. This means private vendors will have more exit options available to them. Limited funding appetite from banks. Banks will remain cautious throughout 2012 and into 2013. M&A activity in primary and secondary care. Increased delivery of services by the private sector will lead to M&A in these sectors over the medium to long-term. The depth of reform initiated by the Health & Social Care Act has created a difficult backdrop for M&A. Nevertheless, it is clear that private providers will achieve a greater share of publicly-funded healthcare services. Further promotion by the government of the alternative models used by the private sector, combined with the removal of regulatory barriers to the sector’s increasing participation will create a positive environment for ongoing consolidation and M&A across the healthcare services sector.Contact usCatalyst Corporate Finance has an experienced team of healthcare experts led by Justin Crowther. If you wouldlike to discuss this report in more detail or the opportunities for your business, call +44 (0) 121 654 5000. Andy Currie, Managing Partner Justin Crowther, Director Andy is Managing Partner at Catalyst. His chief Justin is a Director at Catalyst and has over responsibilities include advising on MBOs, fund ten years’ corporate finance experience. His raising, company acquisitions and disposals, as main responsibilities include advising on MBOs, well as directing Catalyst’s day-to-day operations fund raising, company acquisitions and and developing the firm’s strategy. Andy has disposals. Justin leads our global healthcare transacted across multiple sectors including the sector team and is an expert in the healthcare healthcare sector. services sector. Catalyst Corporate Finance LLP 2012 Zachary Tsai, Principal Zac is a Principal at Catalyst and has over six years’ experience in M&A. His main responsibilities include advising on MBOs, fund raising, company acquisitions and disposals. A key member of the Healthcare sector team, Zac specialises in the UK and international pharmaceuticals market.6
  7. 7. Healthcare Services Sector M&A update Figure 5: Selected recent healthcare services M&A transactions Date Bidder Target Target Product Line Deal Value (£m) Provides residential care facilities specialising in Aug-12 Care UK (UK) Whitwood Care Ltd (UK) n/d assisting those with learning disabilities Provides domicilary care services to the elderly, those Aug-12 City and County Healthcare (UK) Help at Home (UK) n/d with autism, mental health needs and sensory impairment Provides carers and nurses to nursing and Aug-12 Sevacare Holdings (UK) Prompt Care Ltd (UK) n/d residential homes Provides residential care homes and schools for Jul-12 NBGI Private Equity (UK) Horizon Care Ltd (UK) n/d children with emotional and behavioural needs Jun-12 OMERS Private Equity (UK) Lifeways Community Care (UK) Provider of community care services n/d Provider of risk assessment services to the life May-12 Capita (UK) Medicals Direct (UK) 15.2 insurance industry Apr-12 Terra Firma Capital Partners (UK) Four Seasons Healthcare (UK) Provider of elderly and specialist care 825.0 Provider of care and support to people with Apr-12 Voyage Care (UK) Solor Care Group (UK) n/d complex needs Mar-12 Synergy Health (UK) Leoni Studer Hard (CH) Outsource healthcare equipment services 39.7 Feb-12 Doughty Hanson (UK) United Surgical Partners Operator of private hospitals 295.0 Europe (Esp) Healthcare At Home (majority Provider of acute medical treatments in Feb-12 Vitruvian Partners (UK) 40.0 stake) (UK) residential locations Provides foster placements and services for local Jan-12 Graphite Capital (UK) National Fostering Agency (UK) 135.0* authorities Independent Vetcare (August Dec-11 Berry House vetinary practice (UK) Provides veterinary services n/d Private Equity) (UK) Independent Community Care Provides specialist home care for people with Nov-11 ISIS Private Equity (UK) n/d Management (UK) long-term conditions Allied Healthcare International Profesisonal staffing services to the health and Oct-11 Saga Group (UK) 107.0 (USA) social care industries Provides residential and foster care to children Sep-11 Advanced Childcare (UK) Clifford House Ltd (UK) 10.0 emotional and behavioural needs Aug-11 Fostering Solutions (UK) Pathway Care Group Ltd (UK) Provider of fostering services n/d BUPA Spain, subsidiary Centro Internacional de Medicina Jun-11 Provides medical services 18.6 of BUPA UK Avanzada SA (Esp) Apr-11 Priory Group (UK) Craegmoor Group Ltd (UK) Provides long term care facilities 330.0 Provides specialist care and education to children Mar-11 GI Partners (UK) Advanced Childcare Ltd (UK) 28.0 with emotional and behavioural needs Mar-11 Advent International (USA) Priory Group (UK) Provider of acute health and rehabilitation services 925.0 Provider of healthcare staff to prisons and other Feb-11 Saga Group (UK) Nestor Healthcare Group (UK) 133.0 secure units Jan-11 Associated Dental Practices (backed 450.0* Integrated Dental Holdings (UK) Owners and operators of dental practices by Carlyle and Palamon) (UK) Independent Clinical Services Nov-10 Pulse Staffing (UK) Provides healthcare staffing solutions 75.0* (backed by Blackstone) (UK) Jul-10 Four Seasons (UK) Care Principles Specialist care provider n/d Jun-10 General Healthcare Group (UK) Transform Medical Group (UK) Provides cosmetic surgery and related procedures n/d May-10 General Healthcare Group (UK) Abbey Hospitals (UK) Provides healthcare services from four 70.0 Catalyst Corporate Finance LLP 2012 private hospitals Apr-10 Bridgepoint Capital (UK) Care UK (UK) Provides specialist health and social care services 281.0 Mar-10 Virgin Healthcare Holdings (UK) Assura Medical (UK) Provides primary care services 4.0 Feb-10 Mears Group (UK) Supporta (UK) Provides domiciliary care services 27.2 Jan-10 Teachers Private Capital (UK) Acorn Care and Education (UK) Provides specialist care and education for children n/dSource: Catalyst Corporate Finance 7
  8. 8. Selected recent Catalyst Corporate Finance deals Lead adviser on sale to Lead adviser on sale to Lead adviser on sale to Catalyst Corporate Finance Award-winning international corporate finance advice Catalyst advises management teams, private shareholders and corporates on: Buying businesses (MBOs/MBIs/BIMBOs) This is all we do and all we want to do. ‘Mid Market Adviser of the Year’ 2011 Selling businesses Searching for businesses to acquire, both in the UK and overseas Investment opportunities for private equity firms Maximising shareholder value International experience Through our international partnership, Mergers Alliance, Catalyst Corporate Finance provides: Access to overseas buyers International M&A Research Local knowledge of M&A culture Identifying targets overseas and tactics and executing acquisitions London: 5th Floor, 12-18 Grosvenor Gardens London SW1W 0DH Catalyst Corporate Finance LLP 2012 Tel: +44 (0) 20 7881 2960 Birmingham: 9th Floor, Bank House, 8 Cherry Street Birmingham B2 5AL Tel: +44 (0) 121 654 5000 Nottingham: 21 The Triangle, ng2 Business Park Nottingham NG2 1AE www.catalystcf.co.uk Tel: +44 (0) 115 957 8230Catalyst Corporate Finance LLP is a limited liability partnership registered in England & Wales (registered number OC306421)Registered Office: Bank House, 8 Cherry Street, Birmingham, B2 5ALCatalyst Corporate Finance LLP is authorised and regulated by the Financial Services Authority (number 478406)

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