Healthcare Services SectorM&A update

Autumn 2012

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An ageing population and significant public fundingpressures means that the private sector is becoming moreinvolved in delivering healthcare services. This is leadingto increased M&A activity.

Key observations

Trade buyers have renewed capacity for acquisitions. Strongerbalance sheets are allowing management teams to refocus on growth and,with shareholders now more willing to sell than in 2009-2011, this is leadingto an increase in M&A. The deal process can be lengthy, complex and duediligence potentially extensive. However, with the right preparation,vendors can achieve fair valuations and complete transactions.

Mid-market and specialist private equity houses continue to invest.The private healthcare sector, a large element of which is owned by privateequity, dominates delivery of the highly fragmented specialist and domiciliarycare sector. Private equity continues to grow businesses in these sectorswhilst also looking for new platforms.

Overseas institutional investors are acquiring UK assets.Leading pension funds are attracted to healthcare businesses that havescale and stable cash flows, as demonstrated by Ontario MunicipalEmployees Retirement System’s acquisition of Lifeways from August Equity.

Significant opportunity for the private sector in primary andsecondary care. The introduction of GP commissioning and interest inhealthcare models offering alternatives to hospital care will require a higherproportion of services to be delivered by the private sector. The markets forthese services are estimated to be worth around £20 billion.

Landmark contracts awarded to Circle, Virgin Care and Serco demonstratesincreasing recognition from the public sector that leveraging the privatesector’s ability to invest capital and use more efficient delivery models isnecessary for the government to reduce costs while improving the qualityof healthcare.

£20 billion opportunity ahead for the private sector

“The fundamentals in healthcareservices are strong and there is areal opportunity in primary andsecondary care for privateproviders”Justin Crowther, Director

Acquisitions back on thestrategic agenda

Deal activity, especially amongst largercorporates, has picked up since mid-2011.With balance sheets repaired, equitypositions reset or restructuring transactionscompleted, management teams are nowable to focus on growth and acquisitionsare back on their agendas.

Notable recent deals include VoyageHealthcare’s acquisition of Solor Careand Saga’s acquisitions of Allied andNestor. Saga is now the largestdomiciliary care provider in the UK.Other operators such as Four Seasonsand Care UK now have the resourcesand desire to expand their offering,as illustrated by Care UK’s recentacquisition of Whitwood Care.

Acquisition drivers include market sharegrowth and expansion from a regionalto a national offering. Healthcareservices markets remain highlyfragmented, especially the specialistand domiciliary care market. Forexample, post the acquisition of SolorCare, Voyage Healthcare will have amarket share of around just two percent. Acquisitions also allow operatorsto protect margins through economiesof scale.

Buyers are looking for evidence ofresilient trading, robust internal systemsand compliance, and are focusing onthe viability of forward forecasts andstrength of customer relationships.

The number of businesses embarkingon sales processes has increased in2012. Private vendors are morepredisposed to selling than in 2009-2011. Some have moderated theirprice expectations and recognise thatvaluations of 6-8x EBITDA representsensible value.

High level of private equity andinstitutional investor interest

Private equity investors continue to invest inthe sector convinced by its strong long-termdynamics, especially the homecare/domiciliary sector. Since 2009, 40% ofoverall transactions have been in this assetlite sector (see Figure 1).

For those businesses that can deliverexceptional outcomes for users of serviceswhilst implementing efficiencies and beingcompetitive on costs, there areopportunities to create scalable andvaluable businesses across the sector.Activity has been led by three types ofinvestors:

Sector focused houses which continueto invest in new platforms whileconsolidating existing ones. AugustEquity-backed Enara have made aseries of multiple bolt-on acquisitions to

M&A activityincreasing

Healthcare Services Sector M&A update

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Our experience of acting for bothbuyers and sellers in the healthcaresector is that the deal process can belengthy and due diligence potentiallyextensive and complex. Vendors needto ensure they are well prepared. Keyareas to focus on include:

Developing a detailed understandingof historical and future financialperformance

Understanding and presentingappropriate KPIs

Understanding property and leaseagreements

Reviewing compliance history,policies and procedures

Understanding and presenting keycustomer relationships,opportunities and fee discussions

Demonstrating quality of outcomes

Guidance on the dealprocess: be prepared

Trade buyers need togrow market share

PE attracted tosector’s long-term

dynamics

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help it become one of the largestproviders of domiciliary care in theSouth of England. ISIS Private Equityhas acquired Independent CommunityCare Management. These deals areless reliant on bank funding, whichhistorically have leveraged property-backed assets.

Mid-market funds acquiring maturingplatforms such as Graphite Capital’sacquisition of National Fostering Agencyfrom Sovereign, or investing in sizeablebusinesses with strong marketpositions, for example, Advent’scombination of Craegmoor andThe Priory Group.

Large UK and overseas institutionalfunds are attracted to non-cyclicalbusinesses that have scale and strongcash flows. For example, Bridgepoint’sacquisition of Care UK, Canadianpension fund Ontario Teachers’Pension Plan’s acquisition of Acornand OMERS’ acquisition of Lifewaysfrom August Equity.

The public markets remain difficult forhealthcare service businesses. Perceivedreputational risk (heightened by theSouthern Cross implosion) has deterredinvestors. We do not see this lack ofappetite changing in the short tomedium term.

Private equity investors lookingfor exit opportunities

Over the last three years M&A activityhas returned to the volumes experiencedbetween 2002 and 2005 (see Figure 2).We expect the number of exits toaccelerate as investors take advantageof the more favourable M&A environmentto bring investments made pre-2010 tomarket.

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PE-backed exitactivity to increase

Institutional investorsattracted to strong

cash flows

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“Managing healthcare servicesbusinesses is all about focusing onthe detail, creating strong teamsand having best-in-classprocedures.We turned around anunderperforming business andthere was a strategic logic to thedeal with Voyage”Kit Doleman, Ex-Chief executive, Solor Care

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2009 2010 2011 YTD 2012*

Primary Care Secondary care DomcareElderly Specialist Childcare Other

Figure 1: Over 40% of M&A since2009 has been in the domiciliarycare sectorM&A activity since 2009 by healthcare sector

Source: Corpfin, Catalyst Corporate Finance.*August 2012

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

YTD

2012

*

63

45

76

92

130

152

138

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68

40

Figure 2: Activity is returning topre-downturn levelsUK deal volume since 2002

Source: Corpfin, Catalyst Corporate Finance.*August 2012

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The private sector currently delivers a verysmall proportion of primary and secondarycare (see Figure 3). However, if thegovernment is to manage funding pressuresand achieve improved outcomes forpatients this will need to increase.The government will need to access thecapital investment potential of the privatesector and make use of alternative modelsof healthcare delivery which focus on thecommunity and home and away fromhospital care. This is an opportunity forfinancial investors to invest in the earlieststages of this shift.

Areas such as primary care, communityhealth services and commissioning supportservices are potentially worth billions ofpounds:

Primary care: The NHS spent £8.3billion on GP services in England in2009-2010, currently dominated bysmall general practices. However,operators such as multi-practice groupslike The Practice or Virgin Care aregrowing and private providers areestimated to be generating annualrevenues of £185 million, currently2.2% of the addressable market.*Nevertheless, there are significantchallenges to increased penetration,fundamentally around ownershipstructure and access to pensionentitlements.

Community Health Services: Movingsecondary healthcare services intocommunity-based settings is estimatedto be worth £8-£8.5 billion in England.*We believe the private sector coulddeliver up to 20%, or around £2 billion,by 2020.

Signs that the private sector is beingrecognised as capable of deliveringservices in this area are apparent withmajor contract wins by Circle, VirginCare and Serco worth over £700 million(see Figure 4).

Primary and secondary care: the next bigopportunity for private providers

Other specialist services like pathologyare also in focus. South West PathologyServices (the joint venture between Tauntonand Somerset and Yeovil NHS FoundationTrusts and Integrated Pathology

“Since 2006 we have treated twoand a half million NHS patients,offering improved accessibility,convenience and most importantlydelivering improved healthoutcomes - providing good valuefor the NHS”Bart Johnson, Chief executive, Virgin Care

Opportunities inprimary care,

community healthand commissioning

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20%

80%

60%

40%

100%

0%Primary

CareAcute/

secondaryCare

Elderly& PD

Domicillary MH & LD

% delivered by private sector 2020% delivered by private sector today

Delivery by private sectorforecast to increase tobetween 20% and 40%

Private sector alreadydominates delivery

Figure 3: Private sector shouldincrease its share of primary andsecondary care by 2020Proportion of UK public health and social care

delivered by private sector

Source: Department of Health, CatalystCorporate Finance

Private sectorstarting to deliver

secondaryhealthcare services

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Figure 4: Private and public sectors working together: major healthcare contractshave been awarded to the private sector during 2012

* Source: Laing & Buisson Primary Care and Out of Hospital Services UK Market Report 2011/12

In February 2012 Circle became the first ever non-stateprovider to deliver a full range of NHS district generalhospital services as part of a ten-year contract to runHinchingbrooke Healthcare NHS Trust.

Hinchingbrooke staff will continue to be employedby the NHS, retaining their NHS terms and conditionsincluding their NHS pension.

Circle has reported productivity gains and increasedpatient satisfaction at Hinchingbrooke and theday-surgery hospitals it operates in Nottingham.However, this business model is young and yet toshow evidence of profit generation.

In March 2012 Richard Branson’s Virgin Care was awardeda £500 million five-year contract by NHS Surrey to delivercommunity health services in South West and North WestSurrey, and other services (such as sexual and prisonhealth) across Surrey. Some 2,500 staff transferred to

Virgin Care under the agreement and retained theiremployment terms and conditions, including access to theNHS pension scheme. Virgin Care is the preferred bidder fora £130 million contract to provide a range of core NHS andsocial care services for children in Devon.

In March 2012 Serco was awarded a three-year £140million contract to provide community health services forNHS Suffolk. Serco is an example of a company from adifferent sector (facilities management) using its reputation

for supplying to the public sector to take advantage of theopportunity to expand into the healthcare services market.Staff will transfer to Serco under TUPE and should remainin the NHS pension scheme.

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“Reforms across the NHS combinedwith the need for greater efficienciesrepresent increased opportunities forthe private sector to provide moreNHS funded services. The desire tomove services from acute hospitalsinto the community (often linked withusing the Any Qualified Providermodel), increased use of the privatesector in joint ventures/outsourcingfor services such as pathologyand the potential to providecommissioning support services toCCGs are just some examples”Robert Breedon, Partner, Wragge & Co

Partnerships, founded by Sodexo andLabco) and NHS Midlands and East’stender for a five-year £500 million contractwhich is open to private providers, areexamples of the restructuring of pathologyservices into efficient, scalable networks.

Commissioning support services:From April 2013, ClinicalCommissioning Groups (CCGs) willassume responsibility for £80 billionof NHS services in England and willstart buying commissioning supportservices worth an estimated£1.3 billion.*

With further regulation and guidancerelating to commissioning expected overthe coming months, the impact of theHealth & Social Care Act on procurement,delivery channels and models is unclear.Nevertheless, the role of the private sectoris increasing. If this is combined with theremoval of barriers to higher participation,such as in primary care removing practiceboundaries and goodwill on GP practices,investment would be boosted and theopportunity for the private sector to buildbusiness with scale will be considerable.

Locally-accessiblespecialist services to

grow significantly

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Contact usCatalyst Corporate Finance has an experienced team of healthcare experts led by Justin Crowther. If you wouldlike to discuss this report in more detail or the opportunities for your business, call +44 (0) 121 654 5000.

Andy Currie, Managing PartnerAndy is Managing Partner at Catalyst. His chiefresponsibilities include advising on MBOs, fundraising, company acquisitions and disposals, aswell as directing Catalyst’s day-to-day operationsand developing the firm’s strategy. Andy hastransacted across multiple sectors including thehealthcare sector.

Zachary Tsai, PrincipalZac is a Principal at Catalyst and has over sixyears’ experience in M&A. His main responsibilitiesinclude advising on MBOs, fund raising, companyacquisitions and disposals. A key member of theHealthcare sector team, Zac specialises in theUK and international pharmaceuticals market.

Justin Crowther, DirectorJustin is a Director at Catalyst and has overten years’ corporate finance experience. Hismain responsibilities include advising on MBOs,fund raising, company acquisitions anddisposals. Justin leads our global healthcaresector team and is an expert in the healthcareservices sector.

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M&A activity willremain buoyant

Prospects for M&A: our predictionsThe dynamics discussed above mean that the sector is positioned for furtherM&A during the next 18 months.

Specifically, we expect to see:

Further investment from private equity. This will focus on new platformsand existing portfolio investments.

The pace of exits increasing. Driven by platform investments made before 2010seeking exits, vendors’ moderated price expectations and corporate acquirersreturning to the market.

Businesses from other sectors will look to enter the market. Companies fromsectors such as facilities management will try to enter or further penetrate the market.This means private vendors will have more exit options available to them.

Limited funding appetite from banks. Banks will remain cautiousthroughout 2012 and into 2013.

M&A activity in primary and secondary care. Increased delivery of services bythe private sector will lead to M&A in these sectors over the medium to long-term.

The depth of reform initiated by the Health & Social Care Act has created a difficultbackdrop for M&A. Nevertheless, it is clear that private providers will achieve a greatershare of publicly-funded healthcare services. Further promotion by the government of thealternative models used by the private sector, combined with the removal of regulatorybarriers to the sector’s increasing participation will create a positive environment forongoing consolidation and M&A across the healthcare services sector.

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Figure 5: Selected recent healthcare services M&A transactions

Source: Catalyst Corporate Finance

BidderDate Target Target Product Line Deal Value(£m)

Jul-12 NBGI Private Equity (UK) Horizon Care Ltd (UK) Provides residential care homes and schools forchildren with emotional and behavioural needs

n/d

Jun-12 OMERS Private Equity (UK) Lifeways Community Care (UK) Provider of community care services n/d

May-12 Capita (UK) Medicals Direct (UK) Provider of risk assessment services to the lifeinsurance industry

15.2

Apr-12 Terra Firma Capital Partners (UK) Four Seasons Healthcare (UK) Provider of elderly and specialist care 825.0

Apr-12 Voyage Care (UK) Solor Care Group (UK) Provider of care and support to people withcomplex needs

n/d

Mar-12 Synergy Health (UK) Leoni Studer Hard (CH) Outsource healthcare equipment services 39.7

Feb-12 Doughty Hanson (UK) United Surgical PartnersEurope (Esp)

Operator of private hospitals 295.0

Feb-12 Vitruvian Partners (UK) Healthcare At Home (majoritystake) (UK)

Provider of acute medical treatments inresidential locations

40.0

Jan-12 Graphite Capital (UK) National Fostering Agency (UK) Provides foster placements and services for localauthorities

135.0*

Dec-11 Independent Vetcare (AugustPrivate Equity) (UK)

Berry House vetinary practice (UK) Provides veterinary services n/d

Nov-11 ISIS Private Equity (UK) Independent Community CareManagement (UK)

Provides specialist home care for people withlong-term conditions

n/d

Oct-11 Saga Group (UK) Allied Healthcare International(USA)

Profesisonal staffing services to the health andsocial care industries

107.0

Sep-11 Advanced Childcare (UK) Clifford House Ltd (UK) Provides residential and foster care to childrenemotional and behavioural needs

10.0

Aug-11 Fostering Solutions (UK) Pathway Care Group Ltd (UK) Provider of fostering services n/d

Jun-11 BUPA Spain, subsidiaryof BUPA UK

Centro Internacional de MedicinaAvanzada SA (Esp)

Provides medical services 18.6

Apr-11 Priory Group (UK) Craegmoor Group Ltd (UK) Provides long term care facilities 330.0

Mar-11 GI Partners (UK) Advanced Childcare Ltd (UK) Provides specialist care and education to childrenwith emotional and behavioural needs

28.0

Mar-11 Advent International (USA) Priory Group (UK) Provider of acute health and rehabilitation services 925.0

Feb-11 Saga Group (UK) Nestor Healthcare Group (UK) Provider of healthcare staff to prisons and othersecure units

133.0

Jan-11 Associated Dental Practices (backedby Carlyle and Palamon) (UK)

Integrated Dental Holdings (UK) Owners and operators of dental practices 450.0*

Nov-10 Independent Clinical Services(backed by Blackstone) (UK)

Pulse Staffing (UK) Provides healthcare staffing solutions 75.0*

Jul-10 Four Seasons (UK) Care Principles Specialist care provider n/d

Jun-10 General Healthcare Group (UK) Transform Medical Group (UK) Provides cosmetic surgery and related procedures n/d

May-10 General Healthcare Group (UK) Abbey Hospitals (UK) Provides healthcare services from fourprivate hospitals

70.0

Apr-10 Bridgepoint Capital (UK) Care UK (UK) Provides specialist health and social care services 281.0

Mar-10 Virgin Healthcare Holdings (UK) Assura Medical (UK) Provides primary care services 4.0

Feb-10 Mears Group (UK) Supporta (UK) Provides domiciliary care services 27.2

Jan-10 Teachers Private Capital (UK) Acorn Care and Education (UK) Provides specialist care and education for children n/d

Aug-12 Care UK (UK) Whitwood Care Ltd (UK) Provides residential care facilities specialising inassisting those with learning disabilities

n/d

Aug-12 City and County Healthcare (UK) Help at Home (UK) Provides domicilary care services to the elderly, thosewith autism, mental health needs and sensory impairment

n/d

Aug-12 Sevacare Holdings (UK) Prompt Care Ltd (UK) Provides carers and nurses to nursing andresidential homes

n/d

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Catalyst Corporate Finance LLP is a limited liability partnership registered in England & Wales (registered number OC306421)Registered Office: Bank House, 8 Cherry Street, Birmingham, B2 5ALCatalyst Corporate Finance LLP is authorised and regulated by the Financial Services Authority (number 478406)

www.catalystcf.co.uk

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