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Monday, September 06, 2010

Read my lips – the residential care business is in for big problems

The weekend press was full of the trials and tribulations of Southern Cross, the UK’s largest provider of care.

Southern Cross runs 750 homes with 45,000 staff and cares for 33,000 elderly or disabled people. The average age of its residents is 85 and analysts believe it has about 10% of the market.

Like so many of the largest care providers, Southern Cross and Four Seasons, were more a “property play” than anything to do with providing care.

Unfortunately, when the game of musical chairs stopped (i.e. when property prices stopped rising, credit became difficult and nobody was willing to keep inflating the company’s value) it hit the buffers. Just to make thing a tad worse, we have a recession, so the main income stream (fees from local authorities) is being squeezed.

With shares trading at 35p (they were 600p in 2007) and its value cut from £3 billion to £2 billion (if they are lucky) Southern Cross is in a bit of pickle.

Let’s be honest, it is not only the company that is in a bind. The bank that lent them the money (guess who?) is sitting on a loss. Yep, you guessed it (RBS). And who owns RBS? Yep, you got it right, the UK taxpayer.

When 750 “for sale” signs start going up all of the UK there is going to be a lot of panicky MPs fearing local headlines: “Government does nothing whilst care home closes.” You think I am joking?

If this were an isolated instance, the result of inept management, then it could be dismissed. Unfortunately, it isn’t and it is only just the beginning the problems.

This accountant’s report shows that insolvencies are up by 47% for suppliers to public sector compared with
the same period in 2009. All providers of care are going to be suffering from a constraint on their fees and increase in their costs (as inflation keeps doggedly high).

This situation provides massive opportunities for the care providers who understand what is happening and have the ambition and management skills to exploit the industry’s problems. Few of them will. I suspect the reaction will to bury their head as firmly in the sand as possible and hope it will blow over. It will not. Dick Stroud

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