Aged Care M&A Momentum Continues: 2022 Outlook

Jonathan Farrer, Partner (Corporate and M&A) at Corrs Chambers Westgarth

Guest article by Jonathan Farrer (partner), Paul Burns (partner), David Ellenby (partner), Rhys Jewell (partner) and Rachael King (partner) at Corrs Chambers Westgarth

Despite the COVID-19 pandemic, 2021 has been a record year for M&A activity in Australia’s aged care sector, culminating in one of the two largest aged care deals ever announced on the Australian market. [1]

Riding the tailwind of these deals, a number of themes are emerging and playing out across the industry.

We expect many of these to be relevant to the senior care pipeline M&A transactions – which are already preparing for 2022.

1. NOT FOR PROFITS LEADS THE M&A CHARGE

It is no coincidence that two not-for-profit entities were the successful buyers of Allity and Japara – the two largest aged care M&A deals ever announced in the Australian market.

The majority of operators in the elderly care sector are non-profit organizations and have significant advantages over their for-profit counterparts, which can give them an edge in competitive M&A processes. Some examples include income tax, payroll tax, employee benefits tax, and stamp duty concessions and exemptions.

Additionally, nonprofits are able to reinvest profits back into their business rather than being pressured to redistribute profits to shareholders. This can translate into strong balance sheets to help support the financing of M&A transactions (including cash and debt financing).

2. ADVANTAGES OF SCALE

A number of the industry’s leading operators have grown through mergers and acquisitions and in doing so have generated significant financial benefits. The country’s major aged care providers are generally more profitable (on an EBITDA per bed basis) than smaller operators due to factors such as higher occupancy rates, investments in technology, efficient administrative systems, lower procurement costs and more flexible staff rosters.

This creates an environment in which facilities are generally more valuable in the hands of larger operators than smaller operators, which supports the business cases for expanding through M&A activity. The highly fragmented and highly regulated nature of the aged care market accentuates the need for consolidation as smaller operators seek to exit.

3. REGULATORY REFORM INVOLVING EXITS

Many operators continue to seek exit options as the regulatory burden for aged care providers continues to increase.

Following the findings of the Royal Commission on the Quality and Safety of Elderly Care, the Commonwealth Government announced reforms on five ‘key pillars’ to be implemented within five years. The changes will put further pressure on operators’ costs and, in many cases, change the way they run their businesses.

A number of changes will come into effect from July 1, 2022, with a new Aged Care Act proposed to come into force from July 1, 2023 to “support the necessary, generational change required to reform care to older people in Australia. A summary of some of the main changes can be found here.

4. IMPACTS OF COVID-19

The COVID-19 pandemic has significantly changed the operating environment for aged care facilities. In many cases, COVID-19 has forced changes to operating policies, created additional regulatory burdens and increased costs, often making it difficult to continue operations.

Buyers of aged care businesses will generally ensure that their due diligence investigations cover the target’s response to COVID-19. This may include the extent to which staff and residents have been vaccinated against COVID-19, how they have handled outbreaks in specific homes, whether any staff or former staff (including casuals and sub-staff) contractors) contracted COVID-19 while working and how they are positioned to deal with any future outbreaks. Funding received through government COVID-19 relief programs will also generally be reviewed.

COVID-19 is also typically at the center of sales agreement negotiations, particularly for “material adverse change” and “ordinary course of business” clauses (noting that there may be specific exclusions in these pandemic clauses). Warranty and indemnification schemes should also be considered from a COVID-19 perspective.

5. RISK OF STAFF UNDERPAYMENT

As an industry where salaries represent a significant portion of total costs, underpayment of staff is a major risk. Buyers will want to make sure they don’t inherit hidden liability where they subsequently become responsible for years of underpayment of staff or other non-compliant work practices by the previous owners of the business. business.

There are a number of ways to manage this risk through due diligence, protections in the sales contract, and warranty and indemnity insurance. In most cases, a detailed review by an independent accounting firm will help ensure that this risk is properly assessed and allocated appropriately.

6. VERIFICATION OF OWNERSHIP

Property is usually another key asset of aged care businesses, so any restrictions on the use of properties should be considered as part of due diligence. It is not uncommon for properties that contain aged care facilities to be used for other purposes, such as retail uses, retirement village uses and potential development.

It is important to be diligent in these uses as different regulatory regimes apply to each aspect of the property (eg Aged Care Act, Retirement Villages Act). Planning regimes and compliance may also differ depending on the use or proposed use, and various uses may be prohibited by covenants or other transactions recorded on title.

A title review is an important weapon in a client’s due diligence arsenal. It can help determine the actual or historical use of a property containing an aged care facility (for example, there may be a legal notice recorded on title stating that the Retirement Villages Act applies to the property). It should also flush out certain legal encumbrances which, in some cases, can secure large amounts that could affect the value of the transaction.

7. SPIN-OFFS, RESTRUCTURING AND CONSORTIUM AGREEMENTS

As more capital seeks a home in the aged care sector, we expect to see examples of structured deals similar to those seen in adjacent healthcare sectors such as hospitals and centers. medical.

This could include foreign capital partnering with local operators, sale and leaseback agreements, and refinancings. We expect operators to also continue to assess their portfolios with a view to selling non-core assets, such as retirement villages and underperforming sites.


[1] Corrs advised Bolton Clarke on its proposal for Japara Healthcare and its acquisition of Allity. The issues identified in this note do not necessarily reflect issues with these transactions.

Comments are closed.