Focus Healthcare: Servicing the nation’s health Acqusition Finance - Volume 6 Issue 2, June 2007

June 1, 2007

Focus Healthcare: Servicing the nation’s health
Acqusition Finance - Volume 6 Issue 2, June 2007

Private equity firms have played a central role in transforming the healthcare services market in Europe and, in particular, the UK, over recent years according to a report compiled by UBS, the investment bank. Paul Saper of LCS International Consulting Ltd speaks to ACQ about his prognosis

Paul Saper is joint managing director with Tim Elsigood at LCS International Consulting Ltd (LCS) in London. In terms of M&A, he says deal volumes in 2005 and 2006 were very, very high, and both he and Tim expect 2007 may well be just as high.

"The volume of corporate activity in the sector is running nearly five times higher than six or seven years ago," he believes. This is, in fact, borne out by a healthcare services and private equity report compiled by UBS Investment Bank
in which M&A transactions in Europe were valued at near $15m in 2006 compared with only around $3m in 2000 (see graph below).

"If we break it down," continues Paul, "2005 was focused around care homes. In 2006, the emphasis switched to the behavioural side involving special needs services and psychiatric hospitals, and in the first half of 2007 it has switched again- it is focused more on acute surgical hospitals with work in progress including deals involving Abbey Hospitals, Mercury Healthcare, Nations Healthcare and BUPA Hospitals. Capio UK is also expected to be on the blocks before the end of June as their parent has been ‘forced’ to sell their UK business as a result of the European Monopolies Commission.

"Part of the reason why volumes are rising is because actual prices paid have risen as well. Bankers are willing to lend more than before on these transactions. Moreover, we are also seeing much more of the Opco/Propco model where property companies are taking a rather different approach to risk/reward ratios than the traditional private equity firms might have in the past.

"Many of the property companies are making the simple assumption that all these businesses are not cyclical, and nor are they subject to any significant changes in taste and fashion or regulation. Unfortunately, markets do not behave in this way. One or two recent deals have inevitably encountered difficulties."

ACQ: That’s obviously a situation investors will be keen to avoid. So, in light of the pitfalls, what’s your tip for successfully investing in healthcare deals?

"In order to thrive in the sector, not only do you have to have some idea of where the market is today but where it is also likely to go in future, because the only thing you can be sure of is thatthe market is not going to stand still.

"Investors must be wary that business values can go up and down. Rising bond rates on both sides of the Atlantic will shortly be one of the key issues that investors will want to monitor closely in the next few months.

"Too many people also do not fully appreciate that the UK is often many, many years behind the rest of the developed world. If they did, they would better understand that more often than not they would be able to get a good look at what is coming down the road. Moreover there should be an awareness that not everything has worked out very well in the US.

"You make the best returns if you have done sufficient research that enables you to spot the next step change in the market. If you are able to do so, buying a platform which positions you to grow into this next stage will more likely ensure favourable returns for all of the shareholders. Most recent good examples of this in healthcare have been deals in supported living, fostering, and acute hospitals – the latter in particular where management will look to develop up and down the whole value chain in order to gain a strong foothold in the local health economies.

"At LCS, we are involved in around 85% of all health service deals in the UK. What gives us an edge, is our advisory capability and previous experience of the partners in managing businesses. Aside from traditional UK M&A, we have also undertaken work for government agencies in the UK and on the Continent. Additionally we have worked also for private equity firms in Europe and further afield as well. Involvement in so much of the activity in the sector helps us give more rounded advice to our clients and make them better aware of what is happening in ‘connected’ areas."

The last point that Paul made to us was that he is absolutely delighted that Tim Elsigood with 30 years’ experience in healthcare has come on board at LCS from February this year.