Mon Apr 30, 2012 10:44am EDT
* Deal for Four Seasons will repay all existing debt
* Terra Firma's first deal in controversial sector
By Simon Meads
LONDON, April 30 (Reuters) - Terra Firma is stepping into Britain's care homes business with an 825-million pound ($1.34 billion) deal to buy Four Seasons Health, the country's biggest operator in a burgeoning sector dogged by political and public controversy.
Private equity activity in the sector has been scrutinised since the failure of Southern Cross, a listed group previously owned by Blackstone and which collapsed last year.
Despite upheaval in the sector, elderly and specialist care provision needs are forecast to grow 3.1 percent annually over the next 10 years as people live longer, Terra Firma said.
Most of this need will be met by independent services complementing the National Health Service -- which is being overhauled by the coalition government of Prime Minister David Cameron -- and Terra Firma sees Four Seasons as helping it benefit from such long-term growth.
With controversy and concern about sector standards still fresh, however, leading charity Age UK called on all care home owners to be financially transparent.
It also wants Monitor, the economic regulator for health and social care, to be given extended powers to ensure all operators in the sector are on a sound financial footing.
"Behind the Four Seasons price-tag headlines are 20,000 older people whose home is provided by Four Seasons and they, together with their families, need the worry of the last few months over the company's future to be permanently lifted," said Michelle Mitchell, Age UK charity director-general.
"No one should be allowed to enter the care home business without being able to show their business plan provides a stable future for residents of their homes."
The deal is Terra Firma's first foray into the healthcare sector, though it has made something of a speciality of buying companies with significant real estate holdings.
Terra Firma's return to dealmaking follows a torrid period in which it lost control of EMI, wiping out a 1.7-billion pound equity investment in the music group made at the peak of the leveraged buyout boom in 2007.
Four Seasons, some 40 percent owned by Royal Bank of Scotland, had been looking to refinance some 780 million pounds of debt before a September repayment deadline.
The deal is expected to close on or before July 16, at which point its liabilities will be repaid in full.
Rival Southern Cross collapsed because it could not meet crippling rents on a largely leased estate. Four Seasons owns around 60 percent of its care homes, thus limiting exposure to rental costs, Terra Firma said.
Four Seasons has also run into controversy since a highly leveraged takeover by the Qatar Investment Authority's (QIA) British investment vehicle in 2006.
A subsequent restructuring saw QIA walk away from its investment, and creditors -- led by RBS -- swap debt for equity.
A new, smaller debt package of about 525 million pounds, arranged by Goldman Sachs and Barclays will be put in place.
Terra Firma, the private equity group founded by Guy Hands, will put in some 300 million pounds of equity, a person familiar with the situation said.
That equates to a purchase multiple of about eight times Four Seasons' annual earnings before interest, tax, depreciation and amortisation (EBITDA) of more than 100 million pounds, and more manageable leverage of about five times earnings.
That is more in keeping with peers including the Priory Group, which rival private equity firm Advent International bought off Royal Bank of Scotland last year in a 925-million pound deal.
RBS will retain a minority equity stake in the business.
Four Seasons replaced Southern Cross as the sector's biggest independent player, taking over approximately 140 of its homes. It runs 445 care homes and 61 specialist care centres, and has some 24,000 beds.
Its property portfolio has been valued at 940 million pounds, the person said.
The Four Seasons acquisition is likely to be Terra Firma's last big deal for some time.
The five-year investment period on its 5.4-billion euro ($7.16 billion) buyout fund expires next month, with some 90 percent of the capital spent, the person said.
Four Seasons was advised by Rothschild, Gleacher Shacklock and Deutsche Bank. Terra Firma was advised by Barclays and Goldman Sachs.
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