The Covid-19 pandemic has given operators and investors in the care home market new factors to consider when assessing acquisition targets.
Please note: the information contained in this legal update is correct as of the original date of publication.
The Covid-19 pandemic has given operators and investors in the care home market new factors to consider when assessing acquisition targets. Prior to the onset of the pandemic, activity in the care home market across all sectors was at a high level with plenty of interest from established providers and new entrants, including private equity.
The onset of the pandemic had an obvious and immediate impact on M&A activity generally – with potential acquirers and investors looking to keep hold of cash and assess impact, and potential sellers focusing on ensuring their businesses continued to trade profitably and able to mitigate risk of Covid infection.
In the period since lockdown, across much of the care sector, trading has held up albeit in the face of considerable operational and financial challenges. The need for care has not gone away. In fact, in many areas of specialist care, the demand has increased – relatives have needed to accelerate decisions for shielding or other domestic reasons created by Covid. Investors and acquirers on the other hand have, in assessing the market and potential targets, particularly in elderly care, placed greater emphasis on stress-testing the cashflow models of targets in the event that infection enters the home or compromises staffing levels.
At this point in time, only the strongest performing businesses will stand up to such rigorous analysis. This has left many businesses, which would be attractive propositions in ordinary market circumstances, in a state of limbo.
The typical challenges many operators are familiar with, such as tight margins on funded placements, availability of quality staff in certain regions and the ever-increasing regulatory burden, have been exacerbated by the impact of the pandemic. These impacts include:
The early signs are suggesting this may well push some otherwise profitable and well-run homes into distress. On that basis, and as existing cash reserves dry up, one would expect the number and average quality of distressed opportunities on the market to increase and improve.
As a consequence, those seeking growth through acquisition are exploring new ways of increasing their stock and picking up a distressed business at a price reflective of real value for money. It would come as no surprise if, post-pandemic, many investors increasingly factored distressed opportunities into their investment strategy.
It is perhaps trite to say it, but businesses don’t go bust because they aren’t profitable. They go bust because they run out of cash.
There are multiple reasons why a perfectly good care business may find itself in the position of being ‘distressed’, many of which are not terminal and a number of them are summarised above. This creates opportunities to acquire at a discounted price which can, even when factoring in the expense of fixing what has gone wrong, represent real value for an investor (particularly cash buyers due to their ability to act quickly and possibly even negotiate a lower price reflective of that).
Due diligence on the part of the investor is key to establishing whether the business in question presents such an opportunity. Ultimately, investors need to identify the following and quickly (the risk of the business’ position worsening comes with pressures of its own from a transactional and operational/regulatory perspective):
If the assumption that the home has simply been badly run can be put to one side (it is often an oversimplification of broader issues), the potential investor can drill down into the business’ underlying challenges. Some key commercial areas of enquiry which are likely to be towards the top of that list are:
Getting an answer on the above is at least a start for a potential investor to determine whether the business is ‘a diamond in the rough’ in need of a little investment or one to be avoided. The investigations should also help distinguish between chronic or recurring issues and those issues which are attributable to unusual events, such as Covid-19.
The extent to which you can rely on warranties and how valuable they are will depend on a number of factors including:
Warranties are an important part of any corporate transaction. For an investor/acquirer it provides them with a form of retrospective price adjustment in the event that the business or company they are buying is not as it was presented to them.
As the investor/acquirer, if you are able to negotiate a reasonable set of warranties and you are satisfied that the seller will be able to meet any resulting liability, you may be satisfied that you can ‘fall back on a claim under the warranties’. In any other situation (i.e. you pay a little less on the basis that you will not get the benefit of warranties, you are not satisfied with the covenant strength of the vendor or you are not comfortable with the extent of the warranties offered), the evolution of warranty and indemnity insurance (W&I Insurance) could provide you with a neat solution.
Historically, whilst the M&A market was strong, insurers did not tend to look to provide W&I Insurance on accelerated or distressed M&A as the product needed to be adapted to fit and margins would likely be lower than higher value, non-distressed deals. However, with deal volumes down across all sectors, and awareness and availability of W&I Insurance as a product probably at an all-time high, insurers have expressed a willingness to support accelerated or distressed M&A and have generated a product which is aimed at transactions of that nature. Insurance could be used to either:
The second alternative is a relatively new concept and has been created to support accelerated or distressed M&A. Certain insurers have generated a set of ‘synthetic’ warranties and tax indemnity together with a form of due diligence scope. If an investor/buyer can do the due diligence in the scope it should be able to secure the benefit of the ‘synthetic’ warranties/indemnity. Unlike typical W&I Insurance, the ‘synthetic warranties/indemnity’ are negotiated directly between the investor/acquirer and the insurer (and there is no need for a seller to go through a disclosure process in respect of the ‘synthetic’ warranties). Of course, like any insurance, there is a premium to pay which could start at £40,000-50,000. However, it may be a critical piece in effecting the acquisition of a distressed but otherwise potentially viable business (and the consequent preservation of jobs and continuity of care for residents).
The jury is out as to whether or not there will be an appetite for the ‘synthetic’ warranties as they do not avoid the need to do due diligence (which may be a barrier to securing such a policy particularly where the business being sold is in administration or being sold as a ‘pre-pack’) but insurers are keen to deploy these policies and enter the ‘proof of concept’ phase with them.
Through our sector specialist M&A lawyers acting for multiple clients taking advantage of the opportunity to acquire distressed homes, we have a wealth of experience in working to ensure that the acquisition works for them and their growth strategy. Feel free to contact Clare Auty, Joel Nixon, Peter Allen or Ryan Brown to discuss your needs.
Browne Jacobson welcomed the Chief Coroner, His Honour, Judge Thomas Teague, KC as a guest speaker at our recent Health and Care Connect Conference. We are delighted to now publish the key insights from that session, authored by the Chief Coroner himself.
The BMA is advising all NHS / HSCNI consultants to ensure extra-contractual work is paid at the BMA minimum recommended rate and to decline offers of extra-contractual work that doesn't value them appropriately.
Browne Jacobson was delighted to welcome Professor Sir Jonathan Van-Tam as a key note speaker at our recent Health and Care Connect Conference. We are delighted to now share the film of this key note speech together with an article sharing the key insights written by Professor Sir Jonathan Van-Tam himself.
NHS England has published (October 2022) new guidance - Assuring and supporting complex change: Statutory transactions, including mergers and acquisitions.
NHS England has issued an updated (publication 11 October 2022) suite of Complex Change guidance about how it will assure and support proposals for complex change that are reportable to it. New and (where it is still in force) existing Complex Change guidance are as follows.
Created at the end of the Brexit transition period, Retained EU Law is a category of domestic law that consists of EU-derived legislation retained in our domestic legal framework by the European Union (Withdrawal) Act 2018. This was never intended to be a permanent arrangement as parliament promised to deal with retained EU law through the Retained EU Law (Revocation and Reform) Bill (the “Bill”).
It is clear that the digital landscape, often termed cyberspace, is a man-made environment, in which human behaviour dominates and where technology both influences and aids our role in it — through the internet, telecoms and networked computer systems, which are often interdependent. The extent to which any organisation is potentially vulnerable to cyber-attack depends on how well these elements are aligned.
In Mogane v Bradford Teaching Hospitals NHS Foundation Trust the Employment Appeal Tribunal (EAT) considered whether it was fair to dismiss a nurse as redundant on the basis that that her fixed-term contract was due to expire before that of her colleague.
Three months on from the commencement of the new statutory Integrated Care Systems (ICS) Anja Beriro and Gerrard Hanratty reflect on the main themes and issues that have come from the new relationship between local government and health.
The majority of people do not feel the need to embellish their CV to get that coveted position and move on up the career ladder. Their worthiness and benefit to the hiring organisation are easily demonstrated through the recruitment process – application, psychometric testing, selection day or interview.
On Saturday 15 October a wave of light swept the internet when thousands of people flooded social media with pictures of candles to remember the babies that they have lost. This event signifies the end of Baby Loss Awareness Week which aims to break the silence that is associated with baby loss in pregnancy and infancy.
The Coronavirus Act 2020 allowed any registered medical practitioner to sign a medical certificate of cause of death (“MCCD”), even if the deceased was not attended to during his or her last illness and not seen after death, provided that the medical practitioner could state the cause of death to the best of their knowledge and belief.
In our latest Shared Insights session, Focus on Emergency Medicine, chaired by Jennifer Fagin and Amelia Newbold, we were pleased to be joined by: Dr Alex Crowe, Deputy Director Incentive Schemes & Academic Partnerships, NHS Resolution and Consultant Nephrologist and Miss Susie Hewitt MBE, Consultant in Emergency Medicine, University Hospitals of Derby and Burton NHS Foundation Trust.
Browne Jacobson has been ranked as a Top Tier law firm in 25 key practice areas in Legal 500 UK 2023, the independent directory of comparative law firm performance. The firm also continues to underpin its status as one of the leading law firms in the East Midlands region with 16 Tier 1 rankings.
On 7 July this year, NHS England published its statutory guidance for Integrated Care Boards (ICBs) and with it set out the ICBs’ role and responsibilities and how they should collaborate, interact and carry out their anti-fraud, bribery and corruption functions in concert with NHS England.
The Chancellor’s recent mini-budget provided a significant announcement for business as it was confirmed that the off-payroll working rules (known as “IR35”) put in place for public and private sector businesses from 2017 and 2021 will be scrapped from April 2023.
This case provides a reminder to contracting authorities that whilst the bar for an award of damages in procurement cases is high, following the Supreme Court ruling in Energy Solutions EU Ltd v Nuclear Decommissioning Authority [2017] 1 WLR 1373, it is not insurmountable when a contracting authority has acted with disregard to the Public Contracts Regulations 2015 (PCRs). There is also further guidance as to the use of frameworks
Welcome to our August edition of Public Matters, our monthly round-up of legal updates, news and insights for the public sector.
Deprivation of Liberty Safeguards was due to transition to Liberty Protection Safeguards in October 2020 but delayed due to the pandemic. While the public consultation has now closed and we’re still unclear of what the final legislation and code will look like, it’s worth noting and keeping a watching brief.
In this session, our speakers discussed the Fitness to Practise Regime and how we can help.
This will be the first in a series of webinars looking into different areas of care and will focus on elderly care. Our speakers will be looking forward into 2023 and beyond to consider how elderly care may change in the future and will share insights gathered from a round table event held the week before.
As of 21 July, two separate pieces of legislation came into force which seeks to mitigate against strike action. It should come as no surprise that this is a direct response to the rail strikes, which have dominated the news in the last couple of months.
This on-demand webinar is presented by Jacqui Atkinson and Bridget Prosser. What HR issues are on your to-do list and what are the employment law ramifications?
This is an important training course for practising clinicians and any NHS professionals who would benefit from understanding the inquest process, including those working in clinical governance and risk, complaints, family liaison and in-house legal teams.
In this article, we discuss some of the themes we have seen in recent CQC regulation as well as providing an update on the development of their new assessment framework. I will also highlight other key developments in the sector that all providers should be aware of.
This summer saw the publication of a report describing itself as a ‘once in a generation’ opportunity to reset children social care. Based on the current trajectory, the report concluded that 100,000 children would be held in care in the next decade.
This on-demand webinar looks at the Secretary of State’s new powers under the Health & Care Act 2022 & impact on current approach for healthcare providers.
Presented by Gerard Hanratty, this on-demand webinar looks into the key new functions for Integrated Care Systems under the new Health & Care Act 2022. It provides a useful update on what is new, how it may be interpreted and what issues may arise.
This on-demand webinar is suitable for legal and procurement specialists operating within publicly funded contracting authorities.
In this session, our speakers discussed fundamentals of disclosure, general points on disclosure & Post-Pandemic, interested Persons & Patient Safety Incident Response, and how we can help & Takeaway Tips.
The much-anticipated draft Mental Capacity Act Code of Practice and Regulations, including the Liberty Protection Safeguards (“LPS”), has arrived.
The Liberty Protection Safeguards (LPS) were introduced in the Mental Capacity (Amendment) Act 2019 and will replace the Deprivation of Liberty Safeguards (DoLS) system. The LPS framework aims to deliver improved outcomes for people who are or who need to be deprived of their liberty.
Welcome to our latest health newsletter for Summer 2022. We have a packed edition which includes fascinating insights from clients and our own lawyers into the potential impact of the Health and Care Act 2022 and associated DHSC integration policy.
HSIB published its report on Maternal deaths during the first wave of COVID-19. The report takes a closer look at the impact that COVID-19 had during the initial period of March to May 2020.
Browne Jacobson commercial health partner, Jonathan Hayden, speaks to Darren Ramen, UK head of legal at Alliance Medical about the interest surrounding Community Diagnostic Centres (CDCs).
