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Social Care M&A Remains Strong

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Social Care

Following a flurry of activity amongst healthcare clients Corporate Finance Director, James Roberts of Grant Thornton, Cardiff  takes time to highlight how the social care sector is managing to address and overcome a number of well publicized challenges and risks to present outstanding M&A opportunities for operators and funders alike.

In terms of the challenges in social care M&A…

Staffing

Staffing has been and will continue to be a critical area of challenge for care operators in both Wales and England. The impact of the living wage, a shortfall in registered nurses and care staff, as well as the increasingly academic nature of routes to qualification has made the attraction and retention of care staff one of a number of  concerns for operators, as they seek to drive down their dependency on agency staff, due to their potential impact on consistent quality of care and of course costs.

Brexit

The staffing challenge has been brought further into focus following the referendum result which may have adversely affected the pool of available nurses, as new registrations from the EU dipped dramatically, whilst the number of de-registrations escalated. Staffing issues alongside challenges in relation to funding models and comparative fee potential have been factors in some nursing care providers moving towards certain specialist care models. Whilst it is arguable that Brexit may have impacted the staffing environment, it may also touch on the residency status of service users which could impact on future occupancy levels, at least in the short term. Guidelines are expected to be published by Welsh Government on this shortly.

HMRC Intervention

Operators must also be prepared for the increasingly interventionist nature of HMRC in the sector, as it continues to place greater focus on the area of national minimum wage and the impact of uniform requirements, as well as training and travel time which have all given rise to instances of challenge. The approach can also have knock-on effects; following the Mencap decision in relation to sleep-ins (due to be heard on appeal by the Supreme Court in late 2020) many operators have removed ‘top up’ payments to staff which has resulted in several cases of industrial action.

Local Authorities

People aspects aside, regulatory preferences for smaller more sophisticated facilities in the interest of care quality appear increasingly difficult to square with fiscally constrained local authorities who are pushing operators to drive down fees, given the more cost-effective nature of larger homes with greater occupancy and the increasing cost of providing high quality care.

and the opportunities in social care M&A…

Despite the above challenges, the business models of quality operators in the sector remain adaptive and resilient in the face of local authority and NHS budgetary constraints and even with the lingering uncertainties around Brexit, the Social Care M&A market remains strong, with several major groups such as Barchester Healthcare and Care UK currently on the market and other high profile specialist care businesses to be marketed for sale over the coming months.

Investments and Mergers

The recent merger of Caretech and Cambian (now cleared by the CMA) continues a trend of established care operators as prominent players in the M&A market. Private Equity also remains very active with new investments, as in the case of Bridges Fund Management’s £10m investment in Shaw Healthcare and other notable mid-market firms continuing to fund a mix of new home development and corporate acquisitions via their existing platform businesses.

Grant Thornton’s Healthcare team continues to see the sector as one that will continue to present exciting opportunities for well positioned organisations and their owners looking to build and realise value.

Valuations

As a result, valuations of high-quality care businesses remain strong. These valuations have been further supported by the reengagement of Real Estate Investment Trusts (REITs) and the entry of Infrastructure Funds, drawn to the sector by its favorable demographics and the promise of long-term, steady returns. Healthcare, and social care in particular, is increasingly seen as a mainstream assets class by many funds. This is evidenced in cases such as the acquisition of Minster Care Group by Impact Healthcare REIT and the acquisition of Choice Care by iCON Infrastructure, presenting further opportunities for owners of medium size and large care home groups looking to realise value, as property and infrastructure fund backed businesses build additional scale via bolt-on acquisitions.

The Outlook?

In terms of outlook, the care sector presents its share of challenges and these will continue to force operators to evolve, adapt, and invest in their businesses. Deal making in the sector has, in the majority of instances, appeared fairly resistant to any Brexit related uncertainties and having advised on numerous recent M&A deals in Wales and across the UK, Grant Thornton’s Healthcare team continues to see the sector as one that will continue to present exciting opportunities for well positioned organisations and their owners looking to build and realise value.

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