Terra Firma bought Four Seasons for £825 million in 2012, but it has suffered financially due to high staff costs and a squeeze on fees paid by local authorities.
Four Seasons, the UK’s largest care home operator, undertook a strategic evaluation and recently separated its operations into three divisions: private nursing care, dementia and specialised mental health services. It is rumored the restructuring is a prelude to an eventual sale by Terra Firma.
Four Seasons recently appointed Blackstone Advisory Partners to advise on its strategic options. A trade sale may be attractive to Terra Firma. However, the management team may not share the same view in light of the perceived risk of losing their positions. Any future sale by Terra Firma is likely to be achieved by either a secondary buyout or a break up sale.
A buyout is the acquisition of a business by a management team, backed by private equity finance. A secondary buyout is where a private equity backed buyout vehicle (“Newco”) acquires a business which has previously been the subject of a buyout from another private equity provider (“Target”). Secondary buyouts have become important exit routes in the last decade as firms have sought to shorten the lifespan of deals.
A secondary buyout is structured similarly to a primary buyout. Typically, the main parties involved are:
- Newco, as the secondary buyout vehicle.
- The new private equity investor for Newco.
- The Target’s management team, some or all of whom will be exchanging their shareholdings in Target for shareholdings in Newco.
- The current private equity investor of the Target, which will be selling some or all of its shareholding in Target and receiving repayment of the debt it provided to target.
- The senior debt provider (usually a bank).
There are two issues that arise frequently on secondary buyouts.
- Warranty Gaps – In a primary buyout, investors seek contractual protection in the form of warranties and indemnities but on a secondary buyout, the selling private equity firm will probably refuse to provide any protection. There are a number of ways to bridge this gap - an adjustment to the purchase price based on completion accounts or seeking specific warranty and indemnity insurance.
- Alignment – On a primary buyout, the economic interests of the management team are aligned to the private equity investor because they are typically offered shares in the buyout vehicle (referred to as “sweet equity”). On a secondary buyout, managers will be less motivated by a further sale by the new private equity investor as they may have already “cashed out” on the primary buyout. Each deal is different but a balance needs to be struck to incentivise key people.
It is common for private equity investors to restructure a target in preparation for a sale. In order to sell the businesses independently, Four Seasons will need to consider the debt position of the group and particularly whether the finance should be separated across the three divisions.
It is likely that the restructuring will have resulted in the business divisions being transferred into three distinct legal entities. If so then on a future sale of one of the, the employees will still be employed by the same company and on the same terms of employment. However, if the divisions are still within one company, employees assigned to a particular division will automatically transfer to the Newco (under the TUPE regulations) on an asset sale.
It is difficult to speculate the future for Four Seasons but no doubt other private equity firm will be keeping a close eye on the recent activity.
Article first published in the January/February 2015 edition of Care Home Management.