Care UK offer - Care Management Matters magazine

January 7, 2010

On December 17^th, the Directors of Care UK, in response to recent press speculation, made an announcement on the Stock Exchange confirming that the Board had received a number of approaches from interested parties regarding a possible offer for the Company, including an approach from Bridgepoint Capital Limited at 450 pence per share in cash. The Directors stated that they are currently in the process of evaluating the Company’s options. They further stated, at the time, that these discussions are at an early stage and there can be no guarantee that any formal offer for the Company will be forthcoming nor as to the terms of which any formal offer might be made.

Care UK is a major provider of health care and social care services in this country. The Company provides primary care, diagnostics and surgery for NHS patients. It has 7 specialist hospitals and 40+ primary care locations. In social care, the Company provides care for people with complex needs in both care home and community based settings. It has 3,500+ care home places for older people, and 1,000+ specialist care places. It also currently provides 125,000 hours per week of domiciliary care.

Group annual revenue last year was £410M (£250M from social care services and £160M from health care). Main feature of last year’s performance was 9% revenue growth in mental healthcare, and 11% in learning disabilities. In the health care division, 12 new contracts were won in the year, 11 already operational, with preferred bidder status on two further contracts. The Company, however, has been frustrated by the ISTC continuity process, but they still remain optimistic for service continuity for 2010.

The Company has circa 64 million shares in issue (on a fully diluted basis). Current borrowings are around £150M. The bid is worth around £440M in terms of enterprise value (equity + net debt) which is equivalent to around 7.5 times EBITDA. The latter reflects that fact that the bidder is willing to pay more for the asset-backed businesses but rather less for some of the services operations including domiciliary care. The bidder clearly did not wish to pay too large a premium for businesses that will likely come under greater margin pressure over the next two years as Government Agencies increasingly face a much tougher budgetary environment. Nonetheless, the bidder accepted the arguments from the vendor that they would not receive approval for the original lower bid given the favourable long-term prospects for the Company’s healthcare division.

Between the first and the second bid offer from Bridgepoint, the Company’s broker, Investec, had sought to gauge interest from other parties in the market. Word in the market indicates that 3i had shown interest as well as Advent International, (who own Craegmoor), but in reality, Bridgepoint were in prime position. At time of writing, this bid will likely go through.

What does this mean to the market? It really ought to give a dose of reality to many would-be vendors and their agents on what is the real value of their business. If a 7.5 times multiple is perceived as a fair multiple by the Market after a process, smaller players, whether they be a mental health care or frail elderly care provider, cannot expect premium multiples. It is clearly the same for service related businesses.

Paul Saper

CEO

LCS International Consulting

info@lcsic.com