Whether the numbers are up or down, strategic buyers are still in the market for deals. Andrew MacLeod reports
The mouth-watering possibility of a fire sale of money-making NHS operations could provide a year-end tonic for the UK’s private healthcare operators, according to experts in the field.
A judicial review, initiated by the trade union Unison, is currently under way amid concerns that some trusts may be dabbling too freely in private medicine, and are blowing the lid off the earnings ‘cap’ imposed by the government.
Unison alleges that Monitor, the NHS regulator, is turning a blind eye to trusts that set up companies specifically to provide private treatment in a bid to evade restrictions imposed in the Health and Social Care Act 2003. They were intended to prevent back-door privatisation of the NHS.
If Unison wins the argument, says Tim Winn, a lawyer with particular knowledge of the NHS, the large-scale disposal of surplus facilities will follow “in fairly short order”.
Winn, a partner with law firm Mills & Reeve, says: “The consultation process ends in September, and if it goes the wrong way I can easily see that by the end of the year there will be some private patient business to be picked up.
“That’s something that the private sector might want to keep an eye on – and perhaps even start courting people now.”
IN RUDE HEALTH
If his prediction comes true, it will be the icing on the cake for a sector that Winn’s fellow partner, Julian Smith, believes is actually doing rather well despite the economic climate.
“There are contradictory strands,” says Smith. “There is some talk in the press about activity levels declining, but my experience – and from what I hear from other people – is that the sector is holding up very well.
“Big deal activity seems to be quietening down, and IPOs are in the same category – floats of sector businesses have pretty well dried up.
“But in the sub-£100 million market there is quite a lot going on, and there are good opportunities for established healthcare companies, with some resources, to go out and snap up smaller businesses at a time when the multiples are quite encouraging.”
David Brooks, head of M&A with accountants and business advisers Grant Thornton, is broadly in agreement, although he also sees the other side of the coin.
“I think prices in the sector probably peaked in the autumn of 2007, just before the credit crunch,” he observes.
“What we have seen since is more deals failing to get away because of the gap between what the acquirers are prepared to pay, and what the vendors are hoping to get,” he explains.
The result has been an increase in what he describes as “restructuring and refinancing” M&A activity.
“That is going strong and there will be even more of it as the months go by,” adds Brooks, who says conventional transactions have been hit by two factors.
“Firstly the multiples have reduced, and secondly Capital Gains Tax has gone from 10 per cent to 18 per cent. “If you have a good business, why would you sell it now unless you really have to?”
As is often the case, the perception of those who are close to the market does not seem to gel with the facts and figures.
According to Dow Jones Financial Information Services, European investment in healthcare companies increased by 6 per cent in the first quarter of this year, with 56 deals completed, totalling 430 million (£337 million).
Most of this increase was accounted for by activity in the medical devices sector, while pharmaceuticals trod water on deal numbers but fell away in values.
Closer to home, statistics compiled by the Centre of Management Buy-out Research (CMBOR), at Nottingham University, seem to support the theory that deals are not as frequent as in the recent past.
Its figures reveal that the buy-out market in general fell to its lowest level in four years, and the health sector appears to have reflected that decline.
“I think the sector has fallen off a little,” says Rod Ball, research fellow. “What activity there is tends to be among start-ups that turn into trade sales.”
POISED FOR M&A
CMBOR’s figures are gathered from across the healthcare sector – from care homes to pharmaceuticals and medical devices, a field in which Tony Davis has considerable experience.
As chief executive of one of the UK’s regional network of Medilink organisations, which were established to encourage engineering firms, among others, to apply their skills to the booming medical devices sector, he keeps his finger on the market’s pulse.
“M&As tend to play quite well in our sector, because a lot of the innovation takes place at SME level,” says Davis.
Typically, he says, there will be a close relationship between one of the sector’s big fish and one or more small innovators with ground-breaking products.
As they edge closer to market readiness, the nature of the relationship changes and in normal circumstances an acquisition is the next logical step.
Effectively the large established companies are outsourcing their R&D – gaining all the benefits with little of the risk or enormous cost that would otherwise result.
“For the smaller companies it is the next step on the journey,” says Davis. “The amount of investment needed in order to go fully global is beyond the reach of most SMEs. In order to achieve a decent market share they need to be acquired.”
One classic case was the recent acquisition of Warwick-based Midland Medical Technologies by global giant Smith & Nephew.
MMT developed a system for resurfacing replacement hips – a technique which is now a major offering in the Smith & Nephew portfolio.
Davis says this typifies the industry’s outlook – ‘no matter how small your business, think global’.
“This sector of the economy has seen year-on-year growth in national and global terms, and is now seen as a key deliverer for economic development,” he adds.
Anatomy of M&A deals
By Tracey Seath of Birkett Long LLP
Activity in the healthcare sector remains buoyant despite the credit crunch and warnings of a further economic slowdown. Many of the companies involved in acquisitions in this sector have strong track records and have already secured the funding necessary for their growth strategies. This has left them in an enviable position of being able to continue to pursue deals where others have fallen by the wayside, giving them a strong negotiating platform.
At Birkett Long LLP our commercial teams have continued to assist our acquisitive clients in deals ranging from £400,000 to £8 million. Deals include the acquisition of individual residential care and nursing homes, share purchases of care home-owning groups, share and asset purchases of domiciliary care businesses and homes catering for learning difficulties.
The healthcare sector is also producing new groups of private investors, such as GP consortiums who are looking to establish limited companies to enable them to tender for APMS contracts. Our specialist knowledge has ensured that we can guide such groups through the plethora of legal issues associated with such an arrangement.