Many column inches have already been devoted to the situation at Southern Cross, the care homes operator, whose dire financial situation is threatening the future care of 31,000 “vulnerable elderly people” in Britain. Private equity barons, in the guise this time of Blackstone, are once again being accused of exploiting the lax financial conditions of the banking boom years to extract obscene amounts of cash from what many see as primarily a social service.
However the finance director in me did alight on one key quote in the Mail On Sunday from the ex CFO Graham Sizer who said “The company was making a big profit when I left. What changed was that occupancy fell from about 90 per cent to 80 per cent. That is why the company is in trouble”.
It is a frequent contention of mine that most businesses are fairly simple financially speaking, with a limited number of key profit and cash drivers. In the case of Southern Cross, if you find yourself with high fixed costs as a result of your properties being sold off and replaced by long term rental agreements, it becomes a question of filling your care homes to the brim at the highest price possible. If prices and/or occupancy fall then you are in trouble.
The Southern Cross business was thus highly operationally geared which meant that when room rates and occupancy were high, profits and cash theoretically flowed into the business. Indeed the aforementioned Mail On Sunday’s Midas column made them one of their share tips in those halcyon pre austerity times at the beginning of 2010. However as we now know these key indicators subsequently moved the other way leading to the current parlous financial position of the company.
In many ways this has been an accident waiting to happen. In spite of countless long term care reviews the authorities are still putting their heads in the sand and refusing to deal with the issue. The fact remains that we as a nation do not care about long term care, at least not enough to actually pay for it. That is one of the reasons why the private equity owners were able to manage the business in the way they did, extract their mountains of cash, and seemingly leave behind a vulnerable business caring for vulnerable people.
Actually we clearly don’t care about cash enough either. Blackstone did. That’s why they won in the past. We need to get our act together and understand the basics of this business if we are to win in the future.