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The home maker

Having got ahead in advertising in the 1980s Mike Parsons changed direction entirely and has since built up one of the country’s biggest chains of nursing homes. Will the banking crisis put an end to its expansion? Stuart Anderson finds out.

Mike Parsons has changed his nursing home company’s business model lately.

The former ad man who for the past 18 years has built up Barchester Healthcare into a high-end nursing home empire with assets of around £1bn and turnover of £413 million has altered the way the company approaches new developments radically since the credit crunch because he can’t access new bank funding for the purpose.

So, instead of borrowing money to fund new homes, Barchester has begun leasing them from construction firms that raise the necessary finance against their own balance sheets.

The idea for this came from an American company, Trilogy Healthcare, which the firm acquired in 2007.

Parsons explains, “Whereas Barchester has been, up until very recently, 100 per cent freehold, when we acquired Trilogy it wasabout 60 per cent freehold, 40 per cent leasehold. But, in terms of how the company is valued, the fact that it has got 40 per cent leases doesn’t seem to affect value at all. People just accept it.”

So, he says, “when the banks started constraining us” he approached Castleoak Construction, one of Barchester’s regular contractors, and said, “‘If you want to maintain your forward order book with us why don’t you consider building for us on your balance sheet and we’ll take a lease?’”

The contractor agreed and set about raising money to fund construction via Sir Ronald Cohen’s venture capital fund, Bridges Ventures. Other regular contractors then decided to get in on the act and Barchester now has seven leasehold building projects on the go.

“It’s not ideal but I think the banking scene will remain very tight for another couple of years – and it carries us through that period,” Parsons says. “And we have a buy-back option in every case, which satisfies our desire should we ever want to go back to being 100 per cent freehold.”

Barchester currently operates around 200 care homes throughout the UK and Jersey, with over 11,000 residents and 14,000 staff. It has come a long way since 1992 when Parsons, having been appalled by the “really quite dreadful” homes he saw when trying to find long-term care for two great aunts, decided he could do better.

He began his career in a very different world. Having studied economics at Oxford University, he became a management consultant then, after completing an MBA at London Business School, joined agency giant McCann Erickson in 1980, working on the firm’s biggest account, Exxon.

“I just got the flavour for advertising and I was fortunate enough to meet a couple of other guys and set up our own agency, KHBB,” he says. Then, in 1985, a highly acquisitive Saatchi and Saatchi “just sort of made us an offer we couldn’t refuse”.

This offer, he says, wasn’t simply to buy the agency but to use it as a “catalyst” to merge a number of other agencies it owned and put the KHBB team in as management of the merged businesses.

“So I worked with Saatchi’s for almost five years,” Parsons continues. “But I suppose two things happened: the golden era of advertising was coming to an end and, secondly, I got fed up working for a very big company.

“I ended up being the chief operating officer of the international bit. It involved a huge amount of travel, which was great fun in the first year but wears you out in the end, and an opportunity arose to sell out – so I did.”

He then took two years off and spent the bulk of that time living in the United States. And this was where he had the eureka moment that saw him put aside the heady world of advertising in favour of something altogether more tangible.

“More by luck than judgement I came across some really good long-term care facilities over there and it gave me the idea that I could come back to this country and set something up.

“So in 1992 I bought a hill farm in the Cotswolds and two years later we’d transformed it into quite a stunning care facility. Looking back it was an act of madness,” he laughs.

Parsons put £1 million of his own capital – “virtually all the money I’d made in advertising” – in, raised a further million from a private investor and, having been turned down by 13 other banks, took out a £1 million loan with Bank of Ireland to fund the project.

From this beginning, Barchester grew over the next decade to own and operate 73 homes. “We did quite a lot of building and we bought a few individual care homes that met our standards or were three- or four-star homes and, with a bit of investment and care, we could make five-star,” he says.

Then, in 2004, Parsons did a deal that marked a step-change in the company’s growth: “We bought our biggest competitor, Westminster Healthcare, in a £525 million transaction.

“They had 86 homes so they were a fair bit bigger than us. But we felt it was a quality operation and so we took them over and integrated the two companies, achieved very big economies of scale and synergies by reducing their management team, and it worked.”

Barchester is owned by Grove Investments, a vehicle that consists of Parsons and his management team, along with Irish horseracing giants John Magnier, JP McManus and Dermot Desmond. The “big three”, as Parsons describes the latter trio, own about 52 per cent of Grove while he and his management hold the remaining 48 per cent.

“We came together as a group of investors in 1994 and we’ve stuck together ever since,” he continues. “We don’t pay dividends so it is a long-term investment.

And in 2006 we did a refinancing of the company and we returned quite a large sum of money to the shareholders.”

The company now carries a fair bit of debt on its balance sheet. Companies House records for Barchester Holdco (like most groups that combine trading and property companies, Grove’s holdings form something of a corporate cat’s cradle) for the year ended 31 December 2009 reveal bank loans, overdrafts and long-term lending of £977 million, against total fixed assets of £1.09bn.

This significant, though not unmanageable, level of gearing goes some way to explaining how the company has managed to grow so quickly. It is also likely to have put the banks off from 2007 onwards.

In 2009 the trading company Barchester Healthcare achieved a pre-tax profit of £27 million on turnover of £413 million. Barchester quotes earnings before interest, tax depreciation and amortisation of £132 million for 2009.

Other Grove-owned companies include Castlebeck, which cares for people with autism and Asperger’s Syndrome, nursery business Casterbridge and Kedleston, a company that provides services for people with special educational needs.

In 2009 Castlebeck turned a pre-tax profit of £17.6 million on turnover of £56 million, Casterbridge made a pre-tax profit of £2.3 million on turnover of £20.8 million, and Kedleston achieved a pre-tax margin of £1.6 million on turnover of £12.5 million.

The big acquisition, though, was Trilogy Healthcare Systems, headquartered in Kentucky, USA. Acquired in 2007 it, at the time, had 42 care homes. It now operates 64 and plans to increase this to 84 within two years.

Parsons says, “Trilogy only operates in five states in Middle America but it’s a big operator in those five states so it makes them a top-20 provider in the context of the whole of America.

“Like Barchester they’re based on high-quality, high fee rates, either privately funded or working on Medicare, which is the good bit of the funding process in America – you want to avoid Medicaid, which is welfare funding.”

In the UK Barchester positions itself at the top end of the market, a fact recognised in the ratings it achieves from the sector’s regulator, the Care Quality Commission. Parsons says, “Ninety-two per cent of our homes are rated ‘excellent’ or ‘good’. We don’t have any homes rated ‘poor’, which is easily the best profile of any major company in the sector.”

In terms of number of beds, Barchester (with 11,573 in 2009)is fourth in the UK market, behind Southern Cross (39,081), BUPA (21,341) and Four Seasons (17,094). Of these four, Southern Cross and Four Seasons receive resident funding solely from the public sector, while BUPA shares Barchester’s private/NHS/public (ie local authority) mix.

Barchester’s residents’ fees (which Parsons describes as “high to the private individual, high to the NHS and high to local authorities”) are broken down as follows: 25 per cent local authorities; 20 per cent NHS; 55 per cent self-pay.

Nationally, the picture among the firm’s competitors is very different: 52 per cent local authorities; seven per cent NHS; 41 per cent self-pay.

Parsons says he is confident that the Government, which has appointed a commission on care funding that is due to report this July, intends to come up with a solution to the funding of long term care for the elderly, which will either be insurance-based or involve some kind of charge on housing equity.

Parsons goes on to say that the biggest challenge in his sector is the recruitment of high-quality managers: “We’ve got 200 homes; I can’t say we’ve 200 excellent managers. It’s very difficult to find them.

“I’d say we’ve got 180 very good managers but, somehow, it’s a challenge. It’s a difficult job and you want someone who is genuinely compassionate on the one hand but commercial on the other.

“We always talk about getting the mission and the margin in balance. Most of our managers are still nurses by background – and most nurses aren’t by inclination particularly commercial people, although some of them are.”

The recruitment job hasn’t been made any easier by the Government’s stance on immigration. Parsons, who is supportive of the Coalition line on care funding, is less so on the migrants cap.

He says, “It’s a bit of a myth that the nursing homes sector is run totally on overseas staff. It’s not. Ten per cent of our workforce is from overseas.

“Having said that, it’s quite a vital ten per cent in that, historically, we have recruited very extensively from the Philippines – very high-quality nursing training, very high-quality people, very compassionate people.

“We have quite a few very senior Filipino people within the company – nurses and managers. Access to that has been virtually switched off, which is irritating.”

So has this led to British jobs for British people? The tabloids will be disappointed. “I suppose we switched our attention to Eastern Europe,” he continues. “We employ quite a few Polish people, Romanians – excellent, highly motivated people.”

Parsons does say, however, that, “All the reforms and changes with the NHS are making it a lot easier to recruit nurses from the NHS now.”

And Barchester is going to need to recruit a lot more of them if it meets its targets for new care home construction. Parsons explains, “How many Barchester care homes can Britain sustain?

“We’ve got all sorts of computer models and things but just, crudely, there are 10,500 major postcodes in this country and we profile every one of them in terms of wealth, demography, competitors or just the number of care beds. There are probably 200-300 that we’d like to be in that we’re not.

“Another little exercise that we’ve done before: the target market for Barchester is very similar to Waitrose and to Majestic Wine. There are 200 Waitrose locations where there isn’t a Barchester location and an equal number, if not more, of Majestic Wine locations.

“We’re Land’s End to John O’Groats but there are some big, big gaps. We don’t have a care home in Essex. We’re very light in the Midlands and going up to the affluent bits of the North West. There are lots of locations where we’d like to be in Cheshire and around there – so there are plenty of places.”

The constraining effect that a lack of bank lending is having on this expansion – the current leasehold development programme notwithstanding – clearly irritates Parsons. He says, “It’s a huge issue because every time we build a care home we create at least 100 jobs directly, in the care home, let alone the jobs we create in the building industry. And we want to build a lot more care homes.

“So a more obvious way of stimulating the economy I can’t imagine but the banks are just so not interested.”

But what about when these are built? Presumably Parsons and his backers will want to see an exit at some point? “Well, 15 years on, maybe we don’t. All of our backers have families – they’ve got sons and daughters involved in their various family enterprises.

“In 2009 we wrote a five-year plan and we’re sticking to that, so that takes us up to 2014. I can’t comment on, because I don’t know, what’s going to happen beyond there. I think it would probably keep going.”

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