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.
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. …