Care home company Southern Cross is one of the saddest and most worrying casualties of the financial crisis.
Its agonising downfall has been overshadowed by the woes of the banks, but as the provider of care for more than 30,000 vulnerable and frail elderly people in 700 homes up and down the country, Southern Cross is also too important to fail.
As with the banks before their implosion, there is no adequate failure regime in place for privately owned care companies, so residents and their relatives face the fear of people being forced out of homes at a time in their lives when they may not even survive the upheaval.
One question that has been left conspicuously unspoken is whether there might have to be a government bailout to prevent elderly residents being put at risk. For the moment, Southern Cross is playing for time.
The company’s move to put off paying just under a third of its monthly rent from now until the end of September will offer only a temporary reprieve.
It will be hard work for chairman Christopher Fisher and chief executive Jamie Buchan to find a new investor to inject money into the company, and these are not the best market conditions for them to sell properties, particularly since many cannot easily be converted to more profitable uses.
Southern Cross’s landlords are unlikely to be happy about the unilateral rent cut as they have their own cash problems.
The rise and fall of Southern Cross is also a modern-day morality tale. In the pre-crunch City, nursing homes were not so much viewed as places where the elderly could live out their days in dignity, as money-machines.
The thinking was that demand was bound to rise, due to the ageing population. Financiers were attracted by the steady stream of fee income, most of it from local authorities, and investing in the homes themselves looked a lucrative prospect given that property prices were soaring.
Blackstone, the Manhattan-based private equity firm that bought Southern Cross in 2004 and floated it on the stock market in 2006, did rather wel l , quadrupl ing its investment.
But it split the ownership of the properties off from the actual business of care, leaving Southern Cross as a leaseholder with a hefty rent bill and hiving off the freeholds to other companies including the current main landlord, NHP.
Southern’s tactic of borrowing heftily to buy properties and selling them on to landlords stopped working when the financial crisis bit. Austerity hit local authority budgets and more elderly people are receiving care in their own homes.
The saga of Southern Cross will inevitably raise questions about the wisdom of the then Labour government allowing City investors free rein in such a sensitive sector.
It is also likely to provoke a fresh wave of scrutiny of private equity, which is also under the microscope over its role in the collapse of the retailer Focus DIY, where 3,000 jobs are at risk. In that case, Duke Street Capital and Apax took out hundreds of millions of pounds in profit along the way.
For investors in Southern Cross shares it has been a harrowing ride, with the price falling from a peak of more than £6 in 2007 to just 8p. But the human toll exacted on residents and their families is far greater.
If any company provides an object lesson in the debt-driven folly of the boom years and the potential for financial engineering to cause harm to innocent victims, then that company is Southern Cross.
Pension deals The next big item on the ‘to-do’ list for the Takeover Panel is likely to be more safeguards for company pension scheme members when a predator mounts an assault.
These are unlikely to make their way into the panel’s overhaul of City dealmaking rules following Kraft’s highly contentious purchase of Cadbury, which is expected this autumn.
However, the watchdog is sympathetic to rather belated lobbying from the trustees of large company schemes and may well make more rule changes to accommodate their concerns.
Bidders should be made to give more information about their intentions towards the pension fund. This is especially important in deals financed with heavy borrowings, where the scheme may rank low down the list of creditors.
It is about time that the interests of pension scheme members were given more weight in takeovers, to prevent highly-leveraged predators reneging on their obligations.
More transparency can only be a good thing.
Source http://www.dailymail.co.uk/
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