ghp June 2015

10 | ghp June 2015 industry insight UK Private Healthcare Sector Poised for Wave of M&A A commonality of any large, developed market is the hegemony of its largest participants. Grocery sales in the UK are dominated by the ‘big four’ supermarkets that, in the 12 weeks ending 4th January 2015, had a combined market share of over 74%. The publically owned ‘big oil’ super majors, big tobacco and telcos are similarly structured. The conglomeration visible in these sectors came about during intense periods of M&A, in which smaller players were absorbed and larger entities brought together. This consolidation sought to com- bine companies with synergistic components and create efficiencies. The mere prospect of a publically traded company being taken over drives share prices up on the ex- pectation of higher revenues based on the increased efficiency. Royal Dutch Shell’s acquisition of BG Group is a clear example of this. Precedent shows us such deals are incredibly lucrative for principals and spark a flurry of amalgamation within a sector. UK care sector overlooked in M&A wave Identifying a market where such event driven value creation can be found is a sensible investment strat- egy. However, most markets of significant scale are largely consolidated and will remain so until regulatory ‘trust busting’ or significant macroeconomic pressures engender change. One area noticeably overlooked by investors, until recently, is the UK specialist care market. US, European, Middle Eastern, Asian and UK investors are beginning to recognise the sector’s strong long term fundamentals as well as the scope for M&A driven returns. Specialist care is the provision of support for those with learning disabilities, mental health needs and acquired brain injuries. It is a market of considerable size and growth prospects – with the latest Laing & Buisson figures estimating the total market to be worth in the region of £7bn. Laing & Buisson anticipates the market will appreciate at a rate of about 1% per an- num, due to population growth and better diagnosis of mental illnesses. The market is supported by strong, inflation protected fee yields charged for care, paid for by Local Authorities. Despite its size and potential, the UK specialist care sector is highly fragmented, in which the top 10 providers control more than 15% of the market and in excess of 81% of assets lie outside of the top 16 By Oliver Harris, Managing Partner, Montreux Capital Management operators. This presents a huge opportunity for larger participants to purchase some of the many smaller care groups at low P/E multiples, lean out process and bolt on existing platforms and resources. Such actions will fashion earnings growth through cost savings and increase the scope for revenue creation. Transactional activity in the space shows smaller assets are currently being bought at 6x earnings by larger assets trading at 10x, some as much as 13x earnings. It is easy to see how this process is lucra- tive for investors. Transactional activity has accelerated over the last year, driven primarily by private equity and REIT buyers. When looking at the size of the market, current M&A activity and the scope for further deals, we believe the investment opportunity will peak within two to three years before the market’s largest participants have captured the majority of the market. The main reason this has not already happened is that healthcare provision in the UK is a staunchly regulated space, with high fiscal and care driven barriers to entry. However, there are ways for investors to participate. Private equity, REITs and open-ended funds – such as the Montreux Healthcare Fund – have gained traction in the institutional market and are ideally poised to fuel M&A activity in private healthcare. The invest- ment rewards for such vehicles could be consider- able. Montreux Capital Management, for example, recently acquired The Regard Partnership and ACH Care Homes, measurably improving the companies’ earnings with ACH’s run rate EBITDA moving from £4.49m to £5.46m and its investment increasing 99.1% in ten months. Irrefutable demographic drivers of care The UK care market is a compelling investment case underpinned by irrefutable demographic trends. The world is rapidly ageing. Currently, one in six of the UK population is aged 65 and older – a figure projected to reach one in four by 2050 and representing a total increase of 5 million people. The number of those aged 85 and over is set to almost quadruple within the same period. The UK’s ageing population reflects an international phenomena: in part a consequence of the global age structure, with the large baby boom generation inevi- tably approaching retirement, and in part due to rising