Southern Cross, a Haunting Example of How Privatisation Can Go Wrong

By Preston, Alex | New Statesman (1996), June 20, 2011 | Go to article overview

Southern Cross, a Haunting Example of How Privatisation Can Go Wrong


Preston, Alex, New Statesman (1996)


The fate of the Southern Cross care homes group hangs in the balance. With 3,000 job cuts already announced and landlords in revolt over an attempt to impose a unilateral 30 per cent rent reduction, the company set out a dramatic restructuring plan on 9 June, under which it will return almost 50 of its 750 homes to the freehold owners immediately and pull out of a further 85 over the coming two to five years. Southern Cross is currently the largest care homes operator in the UK. If it does survive, it will be as a much smaller operation.

The sharp decline of the business's fortunes will be investigated by a parliamentary committee. However, in a speech in the House of Commons, the Business Secretary, Vince Cable, stressed that the government would not provide a bailout to a company that is widely presented by the press as the victim of private equity vultures.

Selling made sense

A fast-growing start-up founded in 1996, Southern Cross benefited from the privatisation of the care home industry in the late 1990s. In 2002, the firm was bought by the private equity arm of the German bank WestLB for [pounds sterling]80m. A secondary buyout was engineered two years later when Blackstone, one of the world's largest private equity firms, purchased the business for [pounds sterling]162m.

Under Blackstone's management, the firm expanded rapidly, and in 2005 Southern Cross was merged with its competitor Highfield Care, creating the country's largest operator. A further merger, with Ashbourne Homes, secured the company's market-leading position. After the Southern Cross buyout, Blackstone also acquired the NHP group, a property company from which Southern Cross rented most of its properties. And in May 2005, Southern Cross completed the "sale and leaseback" of the 21 properties it owned freehold, a transaction that earned the firm [pounds sterling]100m.

"Sale and leaseback" is a vital strategy for private equity firms looking to release profits from underperforming businesses. The idea is that companies which have previously owned their properties on a freehold basis should sell them to professional landlords (or a self-created "propco") and then lease them back, realising a profit in the process. Looking after the elderly, rather than managing a property portfolio, was Southern Cross's raison d'etre, so selling the homes made sense. Yet this relatively minor transaction, involving less than 3 per cent of the firm's care home portfolio, is being cited by the press as an example of relentless asset-stripping by Blackstone. The parent company, however, merely enshrined "sale and leaseback" at the core of Southern Cross's business model.

[ILLUSTRATION OMITTED]

Many homes were already leased by Southern Cross; many more would be sold and leased back subsequent to Blackstone's sale of the firm. The real error was not ensuring that rents could be altered if the economic climate soured.

The private equity business model, which raises financial risk by increasing debt while attempting to reduce business risk through diversification, operational efficiencies and better management, has certainly had its share of casualties. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Southern Cross, a Haunting Example of How Privatisation Can Go Wrong
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.