Total spending on healthcare in the UK rose to an estimated £120bn in 2006, representing 9.4% of gross domestic product (GDP), up from 7.1% in 2001. And between 2000 and 2004 the increase in spending on healthcare in the UK as a percentage of GDP was bigger than the increases in France, Germany, and Italy, according to a report from the UK’s Office of Health Economics (OHE) published earlier this year.
While this means the UK is spending considerably less in percentage terms than the healthcare-reliant US market which spends a whopping 16% or more of its GDP on caring for its citizens, the UK is now closing the gap with other major European countries such as France and Germany.
What this so-called catch-up investment means for the UK market and for Spain, which shares similar political promises to improve healthcare standards, is that the greater investment is creating a number of new investment opportunities in changing healthcare segments which investment funds are keenly chasing.
Basically, healthcare service providers have attractive fundamentals as demographics indicate people are generally living longer and most people also want to take better care of themselves. Advances in medical technology, medication and clinical procedures have helped improve the efficiency of service delivery. And the regulatory framework reflects a positive attitude to public health policy.
“Part of the reason for the increasing number of opportunities in healthcare is that deal sizes have become larger, whereas in the past one of the problems has been that healthcare deals have been too small, especially if you’re an investor looking at enterprise values of €500m upwards,” says Gerard Conway, a director at
“Healthcare has been an attractive sector for private equity investors because there are fairly consistent and steady revenue streams from the businesses,” says Adrian Johnson, chief executive at
“Valuations have been extremely high and have grown considerably over the last couple of years. With this current credit crunch there is bound to be a levelling off to more sensible levels, so we expect to see a correction of valuations,” says Johnson. “Healthcare businesses have been changing hands at some healthy valuations in the region of 12 to 14 times EBITDA. I’d be surprised if those levels increased any further.”
Recent activity shows that healthcare deals can and do top the £1bn-plus enterprise value mark, but these very large deals tend to be limited in number and are scaled-up businesses over several years if not decades, and are those backed by considerable real estate portfolios.
In mid-June,
The hospital group employs 5,800 staff of which 3,300 are clinical staff. Cinven announced that 2007 revenues are forecast to be £457m with normalised EBITDA of £100.2m. The hospital group is currently being rebranded as
A month later, Cinven revealed it is buying
USP Hospitales operates 33 facilities, including 13 hospitals, three Ambulatory Surgical Centres (ASCs), one imaging centre and 16 outpatient centres. It has over 1,300 beds and over 2,000 physicians under contract with strong presence in key markets such as Madrid and Barcelona.
USP Hospitales focuses on six key specialties: obstetrics and gynaecology, orthopaedic surgery, general surgery, internal medicine, diagnostic services and oncology. According to Cinven, USP Hospitales expected to generate proforma revenues of €280.7m and EBITDA of €47.0m in 2007.
In September, Swedish group Capio AB said it was selling its operations in the UK –
The European Commission mandated the divestment of Capio AB’s UK operations for competition reasons following the acquisition of Capio by funds advised by Apax Partners Worldwide, Nordic Capital Fund VI and by funds advised or managed by Apax France in October 2006.
“A lot of recent multiples certainly for asset backed businesses have been driven by real estate valuations,” says Conway.
However, with rising interest rates across Europe there is pressure on yields for real estate investors, perhaps resulting in fewer of the hospital deals being chased by these types of investors, some commentators say.
Deals like BUPA Hospitals, USP Hospitales and Capio have grabbed the headlines in recent years but they are now being succeeded by a growing wave of deals that are focusing on the provision of specialised healthcare service providers. And these companies are not asset rich.
“As healthcare services become a more popular destination for investment funds there will be a move away from property-driven investments to those driven by NHS policy, including the provision of social care and mental health care,” says Andrew Healey at
“The bulk of the investment dollars will still go to the property-backed deals but in terms of numbers of deals the new service areas will dominate,” he says.
“In some segments of the market, many of the businesses of significant size are already in private equity hands, such as care homes. This is a sector that has been steadily consolidating – if you want to work in that space it is now primarily a question of scale,” says Edmund Reed, partner, Travers Smith, London.
Outsourcing on the up
“The big trend in the UK over the last few years is the government’s desire to increase the outsourcing of care to the private sector. Out of this, businesses have developed for specific areas that have not been uniformly well covered by the public sector in the past, such as care for people with severe learning difficulties and autism,” says Reed.
Deals reflecting the outsourcing trend have been concluded in recent months including Lifeways, a company specialising in the provision of mental health and psychiatric services, and Healthcare at Home, a company providing home deliveries to patients living with long-term chronic illnesses and other services.
Founded in 1992 by Charles Walsh, Healthcare at Home is a provider of complex healthcare to patients at home. The company provides prescription management, dispensing and home delivery of complex drug therapies to patients with long-term, chronic conditions. The company also provides skilled nursing support, enabling patients with complex or severe conditions to receive treatment outside of traditional institutional settings. It currently has 40,000 patients and covers every health authority in the UK.
Acquisition debt facilities totalling £175m were underwritten jointly by Nomura International plc and Landsbanki Ireland, with Nomura International acting as bookrunner. Debt syndication was underway in September. Hutton Collins was advised by Investec, Eversheds, KPMG and Candesic.
“We have put in place a capital structure with an appropriate level of debt for the company, reflecting Hutton Collins’s conservative approach to leverage,” says Doug Oppenheim at Hutton Collins in London. Hutton Collins did not release the enterprise value of Homecare at Home.
“Although the debt markets are currently closed for large buyouts, the mid-market, and in particular the lower end of the mid-market, has been impacted somewhat less,” he says.
“In the UK, this company makes a real difference to the quality of life for over 40,000 patients with chronic illnesses and there are other countries in Europe where a homecare service could deliver similar benefits,” says Oppenheim.
In July, August Equity announced an MBO of
Lifeways offers specialist care to over 900 people with challenging needs, including autism, psychiatric or learning disabilities and acquired brain injuries, in their own home or a community setting.
Commenting on the deal, Philip Rattle at August Equity says: “Lifeways has built its reputation on its flexible and service-user-focused approach and its commitment to high-quality service across the UK.”
“If you want to develop a national platform providing social care you either pay the price that Lifeways cost or you buy and build a smaller business. Lifeways went from an annual turnover of £15m a year to £35m a year in two and half years. We sold the company for three times our investment,” says Healey.
According to Nomura, Lifeways is the only nationwide platform in supported living for learning disabilities which is a £300m, fast-growing market within the UK healthcare services. Its main competition is from local authorities which account for about 33% of the market, not-for-profit organisations and some divisions of larger residential/ acute providers such as Paragon and Regard. Paragon was sold to HgCapital and members of the management team for a total consideration of £322m in April 2006.
Lifeways is possibly like any other company with growth prospects. The business has consistently grown revenue by 30% CAGR or more for the past 12 years and has been profitable for the past eight years, according to Nomura.
Organic growth of the business is in the shape of spot revenues through each of its 23 offices in core supported living markets as offices mature; adding new geographies – it has consistently added three to four branches annually in recent years; expanding its penetration of the 45 approved provider lists with Residential Care programmes from the eight customers that currently buy these services from Lifeways; and large scale tenders –these offer £8m turnover growth per annum and Lifeways has managed 60% to 70% win rates in recent years.
Other companies like
Healthcare funding differs right across Europe, and even if some countries operate more on a medical insurance basis, they will be influenced by public health policy. Again, there is no room to ignore which direction the major policy reviews are heading in and how the myriad of micro reviews could impact on healthcare funding.
The UK’s present prime minister Gordon Brown is of the same central left party as his predecessor Tony Blair, but how the NHS’ annual budget – well in excess of £100bn for the current fiscal year – is shared out can have dramatic implications. As can the decision to carry on with policies, or not, as may be the case with the Brown administration.
“UK health policy will dictate how the market develops and a lot will depend on how new areas of private sector participation develop, and it will be interesting to see how the second wave of the ISTC initiative will be implemented by the health minister Alan Johnson,” says Healey.
“A lot of healthcare service provision is subject to regulation which is dictated by public health policy shaped by politicians,” says Conway. “In the UK, there is the big question how the Brown administration’s approach will affect public health policy compared with the Blair administration.”
“It now looks like the second wave of the Blairite ISTC initiative is being kicked into touch. Fluctuations you see in policy make it very difficult to judge sometimes what will happen to these businesses in the medium term,” he says.
Independent Sector Treatment Sectors or ISTCs were set up as part of the UK government’s plan to cut waiting times and provide greater choice for NHS patients by outsourcing to the private sector. Capio Healthcare UK is the largest provider in the UK with nine such centres.
“You have to be conscious of the Railtrack effect: you are subject to a degree to government spending policies. Although healthcare businesses are supplying services that the country needs, you have to recognise that government policy can change and that the Chancellor can affect the fees that are paid for those services,” says Johnson.
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