Real Deals

The biggest care home provider in the UK, Southern Cross, is teetering on the brink of collapse in a scathing indictment of private equity's profiteering tactics. 

Downing Street today raced to allay fears over the well-being of 31,000 elderly residents as the formerly private equity-owned care company scrambles to avoid bankruptcy. 

David Cameron's official spokesman said: "We are clear that we are putting the interests of residents at the top of the list. Our interest is to make sure these people are cared for effectively.”

Southern Cross has told landlords it will defer 30 per cent of its current rental charges for four months, effective at the beginning of this month, as it struggles to meet property costs. The move is designed to give the company some breathing space while it decides what to do next.

The UK's biggest care provider posted £311m (€352.2m) in losses in its interim results last month and is seeking a £100m rescue package to prevent it from going under. The company conceded in March that its rent obligations had become untenable and that it was attempting to negotiate concessions with landlords to help stabilise the business and pave the way for a fresh capital injection from a new investor. 

That month chief executive Jamie Buchan said: “...it is in the interests of landlords to reach an equitable solution with us to help stabilise our business and create the conditions for new investment to come into our homes.” 

Recent months have witnessed a tough environment for the healthcare industry as commissioners, such as local authorities, bow to swingeing budget cuts as the government attempts to shore up its balance sheet. 

Southern Cross, meanwhile, is bearing the brunt of the lease arrangements that underpin its business model. Overcharging on rent is costing the company a hefty £60 a week per care home bed – totalling an unmanageable £100m a year. Last year it doled out £248.3m in rent to the owners of all the UK properties it occupies. 

“We believe that all of the key stakeholders in Southern Cross want this restructuring to succeed," said Southern Cross chairman Christopher Fishe. "We are in dialogue with the Department of Health, our lenders and landlords and they continue to support the process. Those landlords that do not want to take part in the longer term restructuring will be able to review other options but it is in everyone’s interests if this is as part of a larger, managed and orderly process. 

“The objective will be to emerge with a stable and sustainable business model for the continuing care of our residents. Our primary concern is the continuity of care to all our 31,000 residents.” 

Blackstone bought the business in 2004 for £162m and reportedly made 4x its cash on the deal. The buyout giant implemented an ill-conceived sale-and-lease back strategy known as “opco/propco”, which may well be Southern Cross's undoing if it does not reach a lasting accord with its landlords. 

Now private equity is in the firing line once again, trade union GMB today staging a protest outside the London Business School, where Blackstone is sitting in on a two-day symposium. 

“These kings of private equity meet in secret, excluding the press and the public, what further ravages are they planning for the British economy and British jobs? More is known about the Mafia than about the antics of private equity. It is time to shine a very bright light on their activities,” demanded Paul Kenny, GMB's general secretary. 

HgCapital and Blackstone were thought to be closing in on the embattled nursing operator in January this year, hoping to make a fresh investment ahead of revelations of its lease crisis. But its former £1bn value has now dwindled to a paltry £12m in light of its woes.

Trade body the British Private Equity and Venture Capital Association jumped to the asset class's defence, driving home the need for its involvement in the healthcare sector. Chief executive Mark Florman said: “For over a decade, private equity funds have been significant and responsible investors in health and social care, providing not only necessary capital investment but also introducing modern working practices and efficiencies. With a growing need and constrained public funding, it is imperative that private sector investment continues to flow into the sector.”