Monday 18 December 2017

Barchester lifts debt monkey off its back

Investor: Dermot Desmond,
Investor: Dermot Desmond,
Richard Curran

Richard Curran

Barchester Healthcare, the British nursing home operator backed by big Irish investors like Dermot Desmond, John Magnier and JP McManus, paid back a major chunk of legacy debt last week, in a most interesting deal.

Barchester was set up by British businessman Mike Parsons in the early Nineties. It really took off when former Kerry Group managing director Denis Brosnan became chairman and big guns like Magnier and Desmond got on board.

The group has close to 12,000 nursing home beds spread across over 180 homes throughout the UK. In the heady days of 2006, it separated its nursing homes properties into one company and the operation of the homes into another.

Basically, it sold its nursing homes to itself, borrowed the money to do it and paid out a massive €520m dividend to its shareholders. Magnier alone received around €100m.

The property company collected rent from the operational company, and paid back the interest on the debt. Barchester Group ended up with around £1.1bn (€1.3bn) of debt but was still very profitable, making a pre-tax profit of £30m (€35.6m) in 2011.

However, around £900m of debt was up for repayment next month. When combined with the fact that it lost money on interest and inflation rate swaps, the group had some tough negotiating to do.

The outcome last week was that it sold the property portfolio to a group of unnamed investors called Ravenshill International, for an undisclosed sum. Barchester has declined to comment on speculation that the Ravenshill investors may be linked to some of the Barchester shareholders.

Barchester had its properties independently valued last year at around £1.2bn (€1.4bn).

The sale leaves Barchester virtually debt-free, but paying rent on its homes instead of owning them itself.

The Barchester company that owned the properties was called Bluehood Ltd. Its latest accounts showed that in 2011 it received £73m (€86m) in rent from the operational side of the group and forked out around £68m (€80m) in interest on the debt.

Let's assume the Ravenshill investors bought the properties for the recent valuation price of £1.2bn (€1.4m) and they borrowed the money to pay for them at around 5 per cent annum. If they were to get a 6 per cent yield on the properties, then Barchester would be paying out around £72m (€85m) in rent each year to new owners as part of a 23-year lease.

The advantage for Barchester is that its debt interest bill in 2011 was £75m (€88m). That debt would be virtually cleared and it would end up paying around the same in rental as it was paying servicing the debt.

It would remove the debt monkey from Barchester's back and allow the group to make similar profits into the future. Its balance sheet will be a lot smaller. It will simply be an operating company valued at a multiple of its profits into the future.

The advantage for the new investors is that they could get a solid yield from a reliable and expanding tenant (Barchester) for the next 23 years. They would also benefit from any upside in the value of the properties over that period.

Barchester's asset value will shrink, but so too will its debt. It will still run the same number of nursing homes, but just not own the properties. It looks like a good outcome to a complex situation. Barchester's investors already got a big pay day in 2006. That should keep them going for a while.

Microsoft dance not so sure-footed

"I love this company," was the famous exuberant chant of the stage-dancing Microsoft chief executive Steve Ballmer. But his business is looking increasingly listless of late.

Microsoft and Nokia looked like two former greats clinging to each other last week. They are both hoping that the other one will solve their particular problem.

Microsoft is buying Nokia's handset business for €5.4bn. The handset business was the mainstay of the Finnish 148-year-old company that was valued at €100bn just five years ago.

Microsoft remains a giant, but it is struggling to find its way. The €5.4bn price tag on Nokia's business is just 10 per cent of its cash reserves. So it isn't a huge financial outlay. But it may be a huge ask to think that it can revive Microsoft's tiny 3 per cent market share in the smartphone market.

Microsoft will now inherit 32,000 Nokia employees, with around 18,000 of them working in in-house manufacturing. Good luck with that boys!

Too much has been made of whether Nokia chief executive Stephen Elop will take over at Microsoft from Steve Ballmer. It was hardly a motivation for doing a deal. Just look at the facts. Nokia's share price on the New York Stock Exchange is down 77 per cent in the last five years, while the Dow Jones is up 30 per cent.

At Microsoft, the announcement of the Nokia deal wiped another $11bn off its market capitalisation. Microsoft's Nasdaq share price is up 14 per cent in the last five years, while the Nasdaq has climbed by 77 per cent in the same period.

The Nokia board agonised over the sale, meeting 50 times so far this year before agreeing to sell the jewel in their crown, without realising it has lost a lot of sparkle already.

This looks like a much better deal for a struggling Nokia, than it does for a listless Microsoft.

O'Leary brings the market down to earth

Investors sitting on big paper profits always get nervous. The slightest hint of bad news and they hit the sell button, or automated trading machines do it for them. That is what Ryanair chief executive Michael O'Leary faced when he issued a profit warning last week, that wiped 12 per cent off the share price in a day, wiping €1.3bn off the firm's market capitalisation.

Was O'Leary delivering startlingly grim news or was he providing a reality check to a market that had perhaps overbought the stock. After all, Ryanair shares were up 87 per cent since the start of last year.

O'Leary's warning wasn't cataclysmic but it was worryingly comprehensive touching on currency, price competition, capacity and Europe's weak economy.

Sunday Independent

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