Private equity firms may face payout to rescue crisis-hit healthcare group: Regulator looks at forcing BMI to sell 10 hospitals Lenders to take ownership of majority of buildings
(Guardian (UK) Via Acquire Media NewsEdge) The private equity backers behind BMI Healthcare, Britain's biggest private hospital group, are under mounting pressure to inject capital into the rump of the financially stretched group as it comes under attack from the Competition Commission, accused of extracting excessive profits from insurance firms and patients.
Competition regulators are discussing forcing BMI to sell 10 of its 64 hospitals to unwind its competitive dominance, the Guardian has learned. Among the sites it may be forced to surrender are Alexandra hospital in south Manchester and the Priory hospital in Birmingham - two of BMI's biggest operations.
Meanwhile, without additional capital from its backers, led by South African firm Netcare, Apax Partners and London & Regional, BMI could be brought down by the Competition Commission's intervention. Since the failure of nursing home group Southern Cross two years ago, health and social care regulators have been concerned about the impact on vital services of aggressively financed private providers loaded with unsustainable rent or debt commitments.
As well as wreaking havoc on private insurance groups, any financial crisis at BMI would also trigger disruption for the NHS. Referrals to BMI hospitals from primary care trusts - now clinical commissioning groups - have ballooned. Today, one in three of the 276,000 patients treated by BMI Healthcare each year is paid for by the NHS. Six years ago, the NHS accounted for just 3% of BMI patients.
The health service regulator Monitor, which next April assumes powers to regulate private hospitals that subcontract work from the NHS, could eventually play a critical role in pressing the owners of General Healthcare Group - the business behind the BMI brand - to restructure the under-fire business and provide fresh financial support.
BMI's stretched finances have been ignored by the Competition Commission, which has been looking into the private hospital market since April last year. In a 352-page explanation of its provisional findings published last month, the commission insists BMI, which operates 64 hospitals across Britain with 3,000 beds, is - together with smaller rivals Spire and HCA - exerting too much dominance over private healthcare markets.
In a thinly veiled reference to BMI, the commission acknowledges that some hospital groups may superficially appear to be very far from making the excessive returns implied by its study. But that, it argues, is because their private equity backers acquired these companies in aggressively structured leveraged buyouts. "We are interested in understanding the economic rather than the accounting profitability of the relevant firms," the commission report explains.
One official put it more simply: "If the profits you make are wiped out by [onerous interest or rental costs] that doesn't remove the competition problem."
Behind the scenes, however, the commission is taking a more flexible view. Initially, it had suggested BMI, Spire and HCA might, between them, be forced to surrender 20 hospitals to rival operators. That figure is now expected to be revised down to 13, according to one well-placed source. Of these, however, 10 proposed disposals are likely to be within the BMI group.
That would be a heavy blow for an already struggling company. Even before the commission's threat to enforce selloffs, BMI's finances have been stretched close to the limit. Unable to cope with financial liabilities of more than pounds 2bn, the property arm will soon be surrendered. Ownership of most of the BMI hospital buildings will next month transfer to lenders, who will act as landlord to the rump operating company, which will continue to trade as BMI Healthcare.
BMI insists this will have no impact on the financial health of the ongoing business. However, the latest accounts show the remaining operations are also under strain. Last year, BMI generated an operating profit of about pounds 195m, but had to meet pounds 150m in rent and pounds 14m in interest bills. In addition, it spent pounds 40m on keeping the hospitals in good functioning order.
One analyst said lenders typically insist on a healthcare business generating operating profits of at least two-and-a-half to three times rent and interest bills. Last year, BMI's figure was about 1.2 times. As a result, it saw a net cash outflow after its pounds 40m bill for capital expenditure.
Last month, BMI struck a deal with lenders to reduce its interest bill and delay repayments. Dipping into cash reserves and selling off interests in Transform, a cosmetic surgery business, and the Care fertility clinic chain, helped cut borrowings from pounds 233m a year ago to pounds 145m.
Privately, management admit BMI does little more than cover its rent and capital expenditure in a depressed market.
In an statement, BMI said: "The truth is that, in a challenging market, we are continuing to succeed by efficiently providing high quality independent healthcare and making sensible returns, all of which are reinvested in our hospitals."
(c) 2013 Guardian Newspapers Limited.
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