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CMM Business Clinic – Steve Mills gives his opinion on the Acromas takeover of Allied Healthcare

Acromas' position in the social care sector has been boosted by the news that is to acquire Allied Healthcare, one of the UK's leading providers of domicilary care and healthcare staffing services.

Following the acquisition of social services provider Nestor Healthcare for £124 million in December, it has been reported that Saga and AA owner Acromas, co-owned by private equity fi rms Charterhouse, CVC and Permira, has agreed to buy home care provider Allied Healthcare for £106 million.

LATEST DEAL

Under the deal, expected to be completed by the end of the year, Acromas will pay £2.37 per share, a premium of 59 per cent on Allied Healthcare’s closing price of £1.49 on July 28. Completion of the transaction is subject to the approval of Allied Healthcare’s shareholders.

Commenting on the acquisition in a press statement, Sandy Young, Chief Executive Offi cer of Allied, said, ‘We are pleased to have entered into a transaction that will offer Allied shareholders an attractive valuation. After a robust examination of the strategic alternatives available to the company, our board unanimously concluded that this transaction is in the best interests of our company and shareholders.’

Chief Executive Offi cer of Saga Healthcare, John Ivers, added, ‘Our strategic intent has been to grow our healthcare division organically and through carefully selected acquisitions. I am therefore delighted that Allied is joining the Saga Group. Saga will be the UK’s pre-eminent provider of domiciliary care. We are creating a nationally recognised and trusted provider of quality care in the home.’

Allied Healthcare is one of the UK’s leading healthcare staffi ng providers with over 110 branches nationwide. Staff delivered over 12 million hours of care and support last year – equivalent to over 10 minutes for every man, woman and child in the UK. The company holds contracts with over two thirds of commissioning local authorities and works with over 100 primary care trusts. Allied has over 10,000 homecare staff, support staff and registered nurses.

EXTENDING ITS REACH

Allied Healthcare’s UK subsidiary, Allied Healthcare Group Limited, announced on 28 July 2011 a takeover of the homecare business of the Sue Ryder national charity. Last year, Sue Ryder revenues from homecare activities were in excess of £5 million.

Acromas has been quick to snap up opportunities to expand and now owns several providers of care related services including Saga, the care fee broker offering life annuity products and long-term care funding products. Acromas has been busy this year extending the reach of Saga Independent Living, its domiciliary care business, acquiring operations across southern England and South Wales. Saga Independent Living provides 24-hour live-in care, as well as other home care services that can help with providing personal care on a daily basis or doing the shopping or housework.

Saga has been busy extending its reach in the domiciliary care sector. On 6 December 2010, home care provider Nestor announced it was to be acquired by Saga, and on 1 February 2011, Saga acquired all outstanding Nestor shares for £1.10 per share. As Nestor is no longer a listed company, it has ceased publishing shareholder information. However, half year results for the six month’s ended June 30, 2010, showed that operating profi ts increased 35 per cent to £5.9 million. Social care profi ts increased 42 per cent to £6 million on revenues up seven per cent at £55.7 million. Gross margin increased to 10.9 per cent, compared to 8.2 per cent. Primary care operating profi t of £1.5 million on revenues of £22.2 million was slightly down on the previous year. Cash generated from operations was £6.2 million and closing net borrowings at the half year were £11.9 million.

A POSSIBLE FLOAT?

As we go to press, news is circulating that an Acromas stock market fl oat is on the cards. While its Chief Executive Andrew Goodsell has been reported as saying that there are no imminent plans to list, an initial public offering was one of the options on the table. A fl otation would secure a windfall for staff and management, who own 22 per cent of Acromas. Goodsell reported that Acromas would consider further bolt-on acquisitions to build on its two household names.

MONEY MATTERS

Acromas is well fi nanced (its private equity backed collectively have circa £80 billion under investment, equivalent to the combined GDP of the world’s poorest 50 countries).

Social care is but a small part of its overall business activity. As we go to press, Acromas has been quiet about the Allied acquisition, with some observers wondering if the company is avoiding attention due to the mood against the role of private equity in social care – the fi nancial models of Southern Cross and Castlebeck, for example.

Social care is but a small part of its overall business activity. As we go to press, Acromas has been quiet about the Allied acquisition, with some observers wondering if the company is avoiding attention due to the mood against the role of private equity in social care – the fi nancial models of Southern Cross and Castlebeck, for example.

Social care is but a small part of its overall business activity. As we go to press, Acromas has been quiet about the Allied acquisition, with some observers wondering if the company is avoiding attention due to the mood against the role of private equity in social care – the fi nancial models of Southern Cross and Castlebeck, for example.

It’s also reported that national securities fi rm Faruqi & Faruqi is also investigating the board of directors of Allied Healthcare International for potential breaches of fi duciary duties in connection with the proposed sale.

Stephen Mills

Acromas’ increasing growth and influence may partially go unnoticed since it controls a number of brands and many may not realise, or make, the connection between the ‘high street’ names and Acromas and its private equity backers. But this model of owning several brands increases transaction costs for Acromas, which will drive it to seek fewer, larger contracts and so reduce costs.

The CQC will probably look cautiously at this takeover and won’t want a situation where debt cannot be refinanced. And it is likely to be smarting still from public criticism over its handling of Southern Cross and Castlebeck, both of which were private equity backed.

There is still room for smaller companies, which have the advantage of local knowledge and highly motivated owner/managers. However, larger organisations have the advantage of economies of scale and so more competitive pricing, as well as specialised central services including bid/ contract teams. Most small businesses would lose out in a contract where cost is the bottomline. Few small providers know of the links between the various Acromas brands, so basic competitor analysis will be a starting point. Smaller providers will have to compete on a different level, because they cannot compete on price.

There is still plenty of interest and activity from private equity investors in the social care market. The effect is to drive prices down as the larger organisations seek to deliver to local authorities using their advantage of economies of scale. Equally, local authorities are hard-pressed financially, so welcome this downward pressure on prices.

However, there remains a question mark about the involvement of private equity in social care, as the values and objectives of the investors are arguably opposed to those of the service users. We’ve already seen the tensions of this play out with recent events such as Southern Cross and Castlebeck.