The Hot Market of Nursing Homes
FAZ - Article from 13.02.2009The operators’ contest for top positions has also reached Germany
In less than three years Advent International, a health care operator, has been able to become an operator with more than 7000 beds through the acquisition of Casa Reha and Sozialkonzept. This company was sold to HG Capital for 300 million EUR last year – a previously unprecedented volume in the market segment of nursing homes.
The deal is remarkable although the purchase price is less meaningful due to individual contract conditions. Especially when the sum is compared to the turnover of the acquired company: For 1.00 Euro turnover 1.80 Euro purchase price were paid. In the past these dimensions were only reached by internet companies or in the chemical industry segment. The example shows that the participation of financial investors has accelerated the concentration on the atomised health care market.
In 2007 and 2008 several larger operating companies were taken over by investors: Star Capital acquired the majority of Alloheim with 14 objects. The French Korian took over Phönix with 25 objects. The Deutsche Real Invest AG acquired the operator H&R with 18 objects and Auctus, located in Munich, acquired Procon in Wiesbaden, with eight objects.
Additionally there was a consolidation among the operators: In 2007 Cura bought the Maternus-Kliniken AG which had got into financial difficulties. Curanum acquired the operating companies Elisa, Fazit and Dr. Lohbeck. And Pflegen & Wohnen with 2500 beds was acquired by Vitanas, where the majority share is family-owned, in the context of a privatisation. The buying motives differ: One uses another as a platform for further acquisitions. Another one looks for economies of scale or uses market opportunities such as in the case of Cura and Maternus where the shareholder WCM had become insolvent; or broadens the value-added chain vertically like it was done by Zehnacker with Vitanas at that time.
But although the speed of concentration seems to have accelerated, the market is fragmented: Assuming 10400 nursing homes, the twenty operators that could be considered to be larger ones and are located in Germany do neither hold 10 percent of the objects nor 10 percent of the bed capacity. The number of operators under public law has dropped considerably since the implementation of the long term care insurance. Until today the part of private operators with 38 percent of the bed capacities has decreased disproportionally.
But it will take a further 10 to 15 years until constellations comparable to those in Great Britain will occur. There, a larger number of operators simultaneously operates many hundreds of objects with a multiple number of 10000 beds. This concentration process gathered momentum after existentially difficult times at the beginning of the nineties. The reasons for that are the highly increased real estate prices. In contrast to Germany, in Britain most operators own the objects they operate. The prices for these real estate properties have nearly doubled within a few years. This resulted in a speculative attitude of institutional investors. The buyers’ market turned into a sellers’ market.
The development was similar in the last three years in Germany. As a consequence, high purchase prices have been paid with regard to the earnings ratio (EBITDA-factors). Therefore some balances include high risks: If companies did not balance according to HGB but IFRS, they would have to accomplish the Impairment-Test. This requires the critical checking of accounted goodwill. In singular cases this could have a strong negative influence on the business figures 2008/2009 due to amortisation.
This also concerns the assessments of investment companies. According to FAS 157 and IAS 39 (International Accounting Standards) goodwill can only be balanced with effectively achievable purchase prices, which means their fair value. Therefore they could not be amortised by instalments within a period of 15 years. The situation might also be intensified by financing obligations of good times which are bound to conditions such as the ability to service debts and debt ratio.
If the reorganisation of the German health care market gathers momentum and how strong it will be, depends on many criteria: Which legal changes and requirements will operators force to act? Which investors will also participate in the market in the future?
Last year four deals between 50 and 150 million EUR were cancelled: Due to operator and real estate quality, the bid purchase prices partly were two yearly rents (15 percent) below the cost prices of 2007/2008. Nevertheless does the market concentration progress and mainly arouses larger companies’ interest. Though they act differently, they agree on one aspect: They each want to create one powerful provider. In their opinion, this is the only chance to stand up to the growing competition and foreign companies, which are still preparing for expansion, on the promising German market. In the contest for top positions it is to be expected that the six leading operating companies (Pro Seniore, Kursana, Curanum, Marseille, Vitanas and Casa Reha) will play an important role. But large non-profit organisations like Caritas, Diakonie and DRK should not be underestimated, too.
The author is chairman of the supervisory board of the Terranus-Group, Cologne.