Can we not ban hedge funds and private equity firms from owning care homes? Or, at the very least, write rules to prevent would-be debt wizards playing games of financial leverage in a sector that ought to be a model of balance-sheet stability?
Yes, it’s the annual (or so it feels) crisis at a large provider of residential care. Four Seasons, with 17,000 elderly people under its roofs these days, is a multiple offender. A Qatari-backed buyout firm lost its shirt when it paid £1.5bn for Four Seasons back in 2006. Then it was Guy Hands’ turn when his private equity outfit, Terra Firma, thought the business was worth £825m in 2012 and soon discovered otherwise when it had to finance the deal with bonds yielding as much as 12.25%. Four Seasons has been overwhelmed by interest payments.
The unravelling of Hands’ losing bet has led to administration, with the process enforced by H/2 Capital Partners, a US hedge fund controlled by a US billionaire, Spencer Haber, whose chief talent is bagging distressed loans at knock-down prices. The administration has a long way to run, but Haber & co may even end up making a few quid as chief creditor if buyers can be found for Four Seasons’ actual operations.
As ever, all sides are anxious to reassure the poor residents that their care won’t be affected. There’s no reason to doubt that, since even the failure of Southern Cross in 2011 was more orderly than feared. But there is reason to wonder if this entire sector needs an ownership overhaul.
Financial engineers and junk bond opportunists should not be the natural owners and funders of large care homes companies. Far better to get more pension fund money, seeking lower but more stable returns, through the door.
In the outsourcing sector, the collapse of Carillion a year ago led the government to insist that providers of public services should have solid balance sheets, thus the rush of rights issues from the likes of Capita and Kier Group and the administration and debt-reduction plan at Interserve. Why should care homes be different? Given that entire sector is underpinned by local authority funding, the government ought to be able to to insist on greater financial strength.
The care homes industry has problems beyond an excess of debt, of course. Social care budgets have been squeezed; increases in the minimum wage have had a direct impact; and Brexit uncertainty may make hiring staff more difficult. Yet is hard to avoid the conclusion that all would be easier to manage if the buyout brigade, trying and usually failing to generate supercharged short-term returns for themselves, was off the pitch.
Whitbread still looking good post-Costa
Costa Coffee has gone, and so has the buzz from Whitbread’s share price, down 6% on Tuesday as Premier Inn’s room revenues in the UK fell for the first time in about a decade on a like-for-like basis.
Actually, shareholders can’t grumble too much. A sales decline of a mere 0.6% is hardly crisis, especially if Premier Inn’s small business overnighters – about half its customer base – were infected by Brexit wariness. There was nothing to frighten loyal investors.
After Costa, they are really on board to see if the Premier Inn format can be successfully replicated in Germany. Only two hotels have been opened so far, so it will be a few years before one can tell if management’s hype is justified. That, in turn, raises an interesting question about the planned return of “up to” £2bn of Costa proceeds to shareholders via a tender offer.
The yet-to-be-decided premium to the market price should be tight, by rights. Call the figure 3% since there’s no point rewarding short-termist punters to go away. But, if you’re a true believer in the German adventure, 3% won’t be tempting. Do not be surprised if a lot less than £2bn departs at the first bite.
Hammerson directors’ bonuses are built in
Property group Hammerson can count itself lucky: only 30% of shareholders voted against a pay report that included £900,000 of long-term incentive bonuses shared among four executive directors.
The long-term, in this case, means the 2014-18 period, which wasn’t exactly rewarding for investors: the share price roughly halved. How could an incentive scheme pay out anything in that circumstance?
You can find the mechanical justification in the annual report if you wish (short explanation: earnings were better than the share price) but the cynical interpretation is best. An earthquake is required before the directors get nothing from these schemes.
