Overview of the Market
In the UK, the pre-primary education industry is estimated to be worth approximately £3.6bn with a strong level of forecasted growth at a compound annual rate of 0.5% from 2018 to 2023. High employment levels and growth in the number of children aged 10 and below has resulted in increased demand for child care services. However, this is expected to slow slightly as inflation rates have outstripped wage growth.
The workforce participation rate of women with dependent children affects demand for childcare services. The traditional model of father as sole earner has gradually given way to the modern dual-income family. Parents that work full-time require more hours of childcare and favour providers that offer flexible services.
The government has pledged to increase schemes to subsidise childcare, this is expected to increase demand over the next five years with the amount of free child care set to double from 15 hours a week to 30. However, research conducted by the National Day Nurseries Association has suggested that the initiative is likely to be underfunded, which is likely to result in problems for many industry operators
Nurseries are also expected to face increasing competition from child day-care centres, which may be required to up their educational standards. The UK’s decision to leave the European Union may also have a significant impact on the above forecasts.
A profitability analysis on the sector from a pool of 992 leading UK-based Day Nurseries revealed the following points:
- 374 companies in the industry increased in value over the last year, 187 of these increased by more than 25%
- 388 companies decreased in value, 179 of these decreased by more than 25%
- The most profitable 449 companies made an average profit margin of 8.4%
- The least profitable 543 companies made an average profit margin of -0.1%; the industry average was 2.6%
Based on the Plimsoll company performance matrix, a total of 393 companies were given the highest available rating of ‘Strong’ whereas there was almost the same amount, 348, that received the lowest rating, ‘Danger’. Companies were also rated on their ‘takeover attractiveness’ and despite the large number of companies being in danger, there were 147 companies that were highlighted as highly attractive takeover prospects with a further 766 companies that are worth considering.
The competitive landscape in the childcare industry is highly fragmented, with no company generating more than 5% of total industry revenue. As a result, this represents an opportunity for market consolidation and for larger nursery chains to acquire smaller counterparts.
The two major players in the market are as follows:
- Bright Horizons Family Solutions: Estimated 5.0%
- Busy Bees Day Nurseries: Estimated 0.9%
M&A Activity in the Sector
Market IQ data indicates a total of 136 significant deals in the industry from January 2011 to September 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 and Management Buy-ins.
Upon breaking down the deal type, M&A activity within the sector is mainly categorised by acquisitions, with 133 since January 2011. There were also 2 MBIs and a single MBO. A geographical breakdown of these deals shows that the North West has benefitted from 37 deals, the most in the UK. This was followed closely by the South East with 29 deals. The rest of the deals were spread relatively consistently across the other regions.
Deal flow has been small in each year up to 2014 with a gradual upwards trend through 2018. There was a substantial increase in 2015 to 22 deals, more than double 2014 levels. This rise is characteristic of the value of the industry being identified by private investors and the increasing reliance upon the industry for consumers. This is justified by the YTD 2018 figures, with 35 deals through September 2018, forecasting the same rate to the end of the year gives 47 deals. This would be the highest yearly rate in the data set.
Industry Benchmarking Information - September 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.
|Nurseries Benchmarking Data
|Turnover Growth/Decline (%)
|EBIT Margin (%)
|EBIT Growth/Decline (%)
|EBITDA Margin (%)
|EBITDA Growth/Decline (%)
|Total Net Assets Growth/Decline (%)
Using full company accounts filed in the last two years under the SIC-Codes ‘8891 – Child day-care activities’ and ‘851 – Pre-primary education’, Excluding companies with nil turnover in either period, we have summarised key benchmarking information for businesses under £20m turnover in the table above. September 2018.
M&A Activity Source
MarketIQ - SIC-Codes ‘8891 – Child day-care activities’ and ‘851 – Pre-primary education’, September 2018.