Sector Report

Care Home Industry

Paul Whitney

Corporate Finance Director

Overview of the Market

In the UK, the Residential Nursing Care industry is estimated to be worth approximately £7.1bn, with an annual growth rate of 2.7% between 2013 and 2018. The industry is also forecast to benefit from a 3.6% growth rate from 2018 to 2023.

The industry is going to benefit from an ageing population. It has supported the industry for the past five years and is due to carry on this trend as ageing baby boomers reach an age where residential care is necessary. Furthermore, family members are becoming less able to care for a relative themselves due to busier lifestyles and less unemployment.

Despite increasing demand, profit levels are expected to contract over the next five years as a result of the industry structure. The Government and the NHS arranges care with external providers as a method of mitigating costs. This means that they are in a position of power over the market and can dictate fees paid to nursing homes, resulting in artificially low prices and therefore reduced industry profits.

Sourcing employees will also likely be an issue that the industry has to face in the coming years as the national shortage of nurses extends into the industry. Due to this need for registered nurses, significantly higher wages must be offered. According to Skills for Care, the average turnover rate of a nursing home was 32.1% from 2016 to 2017.

Care Home Companies

A profitability analysis on the sector from a pool of 1,500 leading UK-based Care Home companies revealed the following points:

  • The most profitable 668 companies made an average profit margin of 16.4%
  • The least profitable 832 made an average profit margin of 0.0%; the industry average is 8.4%
  • 629 companies increased their value over the year, with 190 increasing by more than 25%
  • 575 Care Home companies decreased in value. 166 fell by more than 25%

Based on this analysis, companies were then rated on their ‘Takeover Attractiveness’. A total of 413 companies have been rated as ‘Strong’, the highest possible rating, meaning that they are out performing the industry standard and are in a good financial position. The lowest rating of ‘Danger’ was awarded to 779 Care Home companies who are underperforming. 454 companies were highlighted to be prime takeover prospects with a further 928 companies that were outlined to be worth considering.

M&A Activity in the Sector

Market IQ data indicates a total of 291 significant deals in the industry from January 2011 to October 2018, with UK targets. Deals are only reported over a certain value threshold (c.£500k), therefore, it is likely that not all deals have been captured. Data consists solely of Acquisitions, Management Buy-outs, Management Buy-ins, Secondary Buy-outs and Mergers.

Upon breaking down the deal type, M&A activity within the sector is mainly categorised by acquisitions, with 260 since January 2011. There were also 36 MBOs, 7 MBIs and 2 mergers. A geographical breakdown of the deals shows that the South West dominates M&A activity, benefitting from 43 deals in the time frame. The North West was close behind, with 33 completed deals. The rest of the deals are spread throughout other regions whilst slowly declining to Scotland, with only seven deals.

Deal flow has had a scattered pattern with a general trend of growth, with a substantial rise in 2017 from 36 deals to 61 in the year. This rise is characteristic of the ageing population of the UK and the fact that the industry is becoming more attractive to private investors. However, this is not justified by the YTD 2018 figures, with 30 deals through October 2018, forecasting the same rate to the end of the year gives 36 deals, a large reduction in levels.

Industry Benchmarking Information - October 2018

Hallidays’ client base consists of small to lower mid-market enterprises. Our benchmarking analysis reflects businesses with turnover below £20m, in line with the majority of our clients in this sector.

Care Home Benchmarking Data Mean Median Lower Quartile Upper Quartile
Turnover Growth/Decline (%) 4.95 5.03 (0.79) 12.41
EBIT Margin (%) 10.93 11.80 1.67 22.03
EBIT Growth/Decline (%) 8.79 3.96 (40.51) 57.70
EBITDA Margin (%) 14.22 15.66 4.03 26.39
EBITDA Growth/Decline (%) 6.06 2.44 (31.99) 48.41
Total Net Assets Growth/Decline (%) 8.89 7.61 (2.62) 23.77
Current Ratio 3.90 1.35 0.57 3.52
Care Home Benchmarking

Using full company accounts filed in the last two years, excluding companies with nil turnover in either period.
Search Criteria: SIC-Code “87 – Residential care activities”.
Turnover below £20m.

M&A Activity Source

Experian Market IQ (October 2018)
Search Criteria: SIC-Code “887 – Residential care activities”.

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