BC Partners makes 4x return on selling UK General Healthcare

South Africa-listed Network Healthcare (Netcare) has led a consortium that has agreed Europe’s largest-ever leveraged buyout in the medical sector by offering £2.2bn (US$3.93bn) for private equity-backed General Healthcare Group.

Netcare’s other consortium members buying GHG from BC Partners are buyout firm Apax Partners, property company London & Regional and real estate fund boutique Brockton Partners. Netcare will own 50.1% of GHG for investing £217m, out of debt provided by Dresdner Bank, and injecting its UK subsidiary, Netcare Healthcare UK.

The deal transforms Netcare from its South African roots, where its annual turnover was R7.5bn (US$1.6bn) in the 12 months to end-September, into an international company. As one person close to the deal said: “Netcare had been a pot-bound plant as it had run into Competition Commission issues in its home market. This deal will be the largest in Europe for a long while.”

The losing bidders in the NM Rothschild-run auction were buyout firms KKR, Blackstone and Cinven.

Buyout firm BC Partners has made about 4x its money after buying, again advised by Rothschild, GHG for £1.275bn from private equity peer Cinven in 2000. BC has also gained by selling off Partnerships in Care from GHG last year for £560m and refinancing GHG to gain a dividend.

Dresdner Kleinwort Wasserstein and UBS advised Netcare, with debt funded by Barclays and Dresdner Kleinwort Wasserstein. However, by contrast, Dresdner Kleinwort Wasserstein is still struggling to sell nursing homes operator Four Seasons, having started the auction on behalf of its owner, Allianz Capital Partners, in November and with 3i and Borealis reportedly interested in paying about £1.3bn.

UK healthcare is becoming a touchstone sector for the private equity industry. Already in 2006, a number of auctions have started, including Four Seasons and Alliance Medical, with others, such as Southern Cross, Choices, Bond Care, Lifestyle Business and possibly Clinovia, due later in the year.

Tim Murphy, co-head of debt advisory services at Deloitte, summed up the frenzy. “We are seeing frenetic activity in the private equity industry as it looks to make returns on the inherent earnings potential and underlying property value of healthcare,” he said.

His Deloitte colleague, David Jones, a corporate finance partner specialising in the healthcare sector, added that the primary change was the interest by property investors in the healthcare sector, and splitting off the operational company from these assets, such as through a securitisation or other form of asset-backed refinancing.

He said: “The propco/opco model has led to takeover multiples being driven up, for example in the Four Seasons auction currently. But ABN AMRO’s purchase of mental healthcare provider The Priory for £875m last year was ahead of this curve.”

The second major factor supporting buoyant prices currently is relatively high demand combined with a more restricted supply. After to the surge in the population immediately after the Second World War, these baby-boomers are now reaching retirement age. The government has estimated that 40% of the UK’s population will be over 50 by 2015 with the average man expected to live to about 93 by 2050 and the average woman slightly longer.

It is estimated that 800 beds were being taken out of the care home market each month as new regulations on standards took hold but there was increased demand with 14,000 new referrals per year from 2007. This imbalance was supporting increases in fee levels charged to local authorities.

Although the top four companies in the sector, Bupa, Barchester, Southern Cross and General Healthcare, only have about 4%–7% of the market each, the Office of Fair Trading is likely to object to a merger between these groups concentrating consolidation fever on smaller companies.

James Mawson