Netcare has announced plans to dispose of its interests in BMI Healthcare, citing ‘unsustainable’ escalation in rent and softening demand from the NHS.
A statement released by the South African hospital operator yesterday (28 March) said that after five years of negotiations with its largest landlord, it had concluded it ‘highly unlikely’ that a rent reduction could be agreed which would allow BMI to ‘remain competitive and simultaneously generate an appropriate risk adjusted return commensurate with the rest of the Netcare group’s businesses’.
Netcare acquired BMI’s parent company General Healthcare Group for £2.2bn in 2006 as part of a consortium including Apax, London & Regional and Brockton Partners. Shortly after the acquisition, it was restructured in a OpCo\PropCo arrangement, with the hospital properties leased back to BMI Healthcare under long-term leases. Its largest landlord is Theatre PropCo, which owns 35 of its 59 hospitals.
Netcare CEO Richard Friedland said: ‘When these UK lease arrangements were concluded, they were considered market related and provided for a fixed escalation in rent of 2.5% per annum. However, following the global financial crisis of 2008, the accompanying declining private medical insurance (PMI) demand, and the sustained period of exceptionally low inflation in recent years, BMI Healthcare’s rent obligations have grown to be unaffordable.
According to Friedland, rental costs represented approximately 20% of UK revenue in 2017. ‘This is a drain on capital which BMI Healthcare otherwise needs for ongoing and future investment. This circumstance is not dissimilar to other businesses in the UK where rent obligations have become onerous,’ he said.
The idea of exiting the UK market was mooted by Netcare in November 2017 after BMI reported operating losses of £20.6m and a 0.9% dip in revenue to £887.1m. The company said 2017 had an been ‘extremely challenging year’, in which NHS demand had softened and the changing case mix had impacted on revenue per case.
Weak performance has continued into 2018, with the number of inpatient and daycases down 2.2% in the five months to February. At the same time, ‘stringent demand management strategies’ imposed by NHS commissioners fuelled a 4.4% drop in NHS referrals. And although self-pay numbers grew by 3%, PMI fell by 5.7%.
Friedland said NHS work had partially compensated for falling PMI demand since the global recession in 2008, changing the case mix to lower tariff work, but that this too was now under threat due to NHS demand management.
‘These pricing pressures have required the business to respond and implement efficiency measures. BMI has successfully done so over the last few years, but it is now critical that this large fixed rental cost be corrected as market conditions in the UK are expected to remain challenging in the medium to long term,’ he added.
A short-term funding solution concluded with BMI Healthcare’s lenders in December 2017 will end on 31 March, and although further short-term funding has been arranged, it is on the basis that existing GHG shareholders will relinquish effective control of the boards of directors of BMI Healthcare. Netcare has agreed, in the interests of the business, to accede to this demand, which has allowed BMI to conclude a further short-term funding arrangement with its lenders and it will continue to pursue a longer-term funding arrangement.
BMI chief executive Dr Karen Prins said the announcement would not affect the day-to-day running of the hospitals and that it’s first duty remained the safe delivery of effective healthcare for patients.
‘We have liquidity and are moving towards a long-term recapitalisation of the business, with a number of discussions active towards that end,’ she said. ‘BMI remains a stable and profitable healthcare provider and our staff and consultants continue to provide an excellent quality service. The background financial discussions are not hampering our ability, or our commitment, to excellent healthcare.’
Additional announcements from Netcare will be made ‘as and when appropriate’.