Southern Cross

Today’s news: Southern Cross, Britain’s biggest care home operator, goes bust.  Brought down by an imbalance of costs and revenues.

In a market economy, that should mean assets up for sale at distressed prices.  A good business opportunity for someone who can get a handle on costs.  How feasible is that, without sacrificing quality?

In principle it should be entirely possible.  Southern Cross is crippled by its rents, which are based on a bubble-price formula.  Its landlords (those who aren’t simply taking over operation of the homes themselves) are in a bind: they can’t in general just turf the old dears out and market the houses with vacant possession!  They’ll pretty-much have to take what deal they can get with whatever new operator is prepared to take on their homes.  And a new operator is obviously going to need to negotiate much lower rents.  Or buy out freeholds, again at prices that make the business viable.

Of course the landlords want better than that: they want a taxpayer bailout.  And they may be pushing on an open door: the chattering classes are making their case for them, by presenting the situation as Councils must take over or the old dears are out on the street!  An emotive argument, but a fallacy: what it really means is that the long-suffering taxpayer should be blackmailed into paying costs well above what the market could support, to the benefit of the landlords.

If councils have the guts to call their bluff, I might stand to benefit myself.  I have a few quid invested in a fund that supports management buyouts in cases like this.  But not, I hope, at prices that compete with the taxpayer!

The Southern Cross story might be the country’s economic problems in microcosm.  Crushed by the cost of property, and competing against a bottomless taxpayer pocket that pours billions every month into propping up prices!  The fact that care homes are residential property exposes them to the full blast of competition from taxpayer-funded buyer incentives, SMI, £21 billion/year housing benefit, and the whole ethos of the tax-and-benefits system, in their marketplace.

Under the previous government, a bailout would’ve been a foregone conclusion.  What happens now could be an interesting straw in the wind.  My best guess: a 90% bailout, with the landlords taking (as with housing benefit tightening) just a very small haircut.

Posted on July 11, 2011, in uk. Bookmark the permalink. 3 Comments.

  1. According to Wikipedia, Southern Cross’s current ownership is already the product of a management buyout in 2004 (from its previous owners, a New Zealand company that, coincidentally, is a client of my employer). So I doubt if another MBO is on the cards at this point.

  2. A lot has happened since 2004. Including the property restructuring that led to them being crippled.

    Oh, and the fund in question would be supporting small-scale MBOs. Individual homes or small groups, not big portfolios.

  3. Part of the problem stems from the private equity group who flogged the property to RBS to make a packet out of the company asset before floating it. The whole lot smells, so I suspect this story will run and run.

    Councils reportedly have collectively enough spare capacity to close all Southern Cross homes and move residents out, although probably not all in the right places. Councils also have no money, which is one of the reasons blamed for the low occupancy rates Southern Cross was experiencing.

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