Growing with Age: Dealtracker for the Aged Care Sector

In this Dealtracker publication for the Aged Care industry titled "Growing with Age", we have reviewed Mergers and Acquisition (M&A) and Initial Public Offering (IPO) activity in the Aged Care sector between 1 January 2008 and 31 March 2015.

Despite generally subdued M&A market conditions during this period, there have been a number of large Aged Care M&A transactions, as well as the successful listings of two major operators on the Australian Securities Exchange ("ASX").

The industry is going through substantial change and restructuring. The growing demand for Aged Care services combined with the potential additional revenue opportunities arising from the implementation of the Government’s Living Longer Living Better reforms, is driving private investment in the sector. We expect to continue to see strong levels of M&A and IPO activity, as the major operators continue to capitalise on the growth and consolidation opportunities available.

Key insights:

1. Mostly for profit buyers
   Whilst Not for Profit make up the majority of operators, almost all (92%) of the buyers of the Aged Care beds in the last five years have been for-profit  organisations. Private investors are attracted to the sector because of the high growth forecasts, underpinned by our ageing population and their increasing care requirements. The Government’s recent Living Longer Living Better (LLLB) reforms should also help encourage additional private investment into the sector, as there are now opportunities for operators to earn additional revenue via the provision of extra services through more of a “user pays” system, and increase cash flows for further expansion through the issue of Refundable Accommodation Deposits (known as a “RADs” or bonds) to high care residents.
2. Private Equity buyers likely to create further industry change
   Private Equity (PE) buyers were behind the acquisition of approximately 43% of the beds that were acquired during the period. The PE buyers were Archer Capital, which acquired Lend Lease’s Aged Care portfolio in 2013 (now branded Allity) and Quadrant Private Equity (Quadrant), which acquired Estia Health in 2013. Since acquiring these businesses, the PE firms have undertaken
   further bolt on acquisitions to quickly build scale and gain economies of scale. This PE investment is expected to benefit the industry, as the PE buyers plan to invest in improving systems, enhancing care models and in providing the funds needed to expand and upgrade facilities. These sophisticated investors are also expected to help the industry build potential new revenue streams to help reduce the current level of reliance on government funding.
3. High valuations being achieved on some sales
   Some facilities have been sold at very high valuation multiples. The ones that have attracted the most acquirer interest are the larger, multi-site facilities that have assisted the buyers to quickly expand their operations, either nationally or in regions of high demand. Other factors driving high valuations include: modern facilities with single or double room configurations and ensuites;
   facilities with high care standards; and operations where there is potential to provide 'extra services' to residents for additional fees.
4. The Not for Profit operators will need to assess their strategy
   The large, Not for Profit operators have been noticeably absent from the list of buyers during the period. Nonetheless, not-for-profit operators must expect to be impacted by the increasing levels of private sector ownership and investment. Rivalry for residents is likely to increase in certain regions, as residents come to expect more modern facilities and additional service  offerings. Not for profit operators may be required to invest in upgrading their facilities to remain competitive in certain regions. Accordingly, Not for Profit operators may need to consider whether such potential additional investment aligns with their core purpose and, if not, may wish to consider selling facilities to capitalise on the high valuations currently on offer.
5. Further consolidation likely
   Most of the large for profit providers have plans to continue to expand through acquisitions. With 89% of operators currently having 5 facilities or less, there is unlikely to be a shortage of acquisition targets. Indeed, many of the smaller operators, particularly those with lower profitability levels and older style facilities, may become forced sellers, particularly if they struggle to remain financially viable following the impact of some of the less favourable recent industry reforms.