Will Australian aged care providers invest, acquire or consolidate for growth?

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At a recent round table attended by leaders from across the aged care sector, attendees discussed the potential for industry disruption and the resulting likely shape of industry investment, acquisition and consolidation. This paper discusses some of the issues covered.

Digital disruption coming soon

According to Jim Birch, Chair of the Australian Digital Health Agency (ADHA), healthcare hasn’t been very disrupted by digital – and aged care barely at all.

"Digital health isn’t going to work until you achieve national coherency
– when you can drive the healthcare and aged care systems with digital."

Birch hopes to facilitate that coherency by building the underpinning infrastructure required to make digital health work.

"Our role is not to make apps, it’s about creating an ecosystem infrastructure
that will allow private and public players to flourish in digital health."
  • Interoperability will be a massive opportunity for aged care players

    "Many big vendors don’t want to be interoperable, so you can either legislate or encourage that move. In the US in the end they legislated. Given the US experience, in Australia I anticipate negotiated interoperability. But it will happen – one way or another – and that will be a massive opportunity for aged care players, completely altering the landscape."

  • The big area of disruption will be in home care, rather than residential care

    Birch is convinced it will not be led by aged care companies. “It will be the tech, real estate, building and logistics sectors. They’ll be coming hard because aged care is recession proof.” He also thinks our most innovative home care models won’t come out of Australia – but will be developed in Asia.

  • Providers will need to take cyber threats seriously

    “Health care records, which are worth considerably more than credit cards, will be increasingly targeted by cyber criminals. In mitigating this risk, aged care providers need to be mindful of the third-party contractors that have access to their systems. Three-quarters of all data breaches come through third parties.”

A banker’s perspective

The scene is set for strong levels of M&A given the growth and consolidation opportunities available in the fragmented sector. But Richard Gates, the former Head of Health Care Banking at ANZ, says that bank appetite to fund transactions in the sector will depend on a number of factors.

  • The sector has generally not been well understood

    "Currently, residential aged care has a cloud over it and lending multiples have been tightened. But there are positive signs in the retirement sector, and banks have their cheque books open for greenfield development.”

  • The sector may start to see more Opco Propco deals

    This is where companies are divided into an operating company and a property company. Opco Propco has traditionally been rare in the aged care sector, as operators have been able to raise debt capital at a lower cost than the Opco Propco structured transactions. However, there’s speculation that we may see more portfolios being dissected to leverage core cash flows around beds.

  • There is potential to use capital flows to lift earnings per share and dividend yields

    “Superfund direct investment in aged care operators now seems imminent. Analysts’ coverage of the listed players has given a high degree of transparency and confidence – aged care earnings yields must be looking pretty attractive to some institutional superfunds.”

Limited Asia-Pacific inbound investment, but massive outbound opportunities

EY’s China Business Partner, John Li, observes minimal success for Asia-Pacific inbound investment in aged care for several reasons:

  • Market complexities

    "Chinese investors were quick to grasp the fundamentals of Australia’s real estate market, which is very straight forward. However, in aged care, where the business and funding models are highly complex, they need more time to explore the market.”

  • Deal size

    “Asian investors are generally looking for sizable transactions, at the top end of the market with well-known brands. The first questions Chinese investors ask are: ‘Which is the biggest? Which is the best? Which has the longest history?’ We have seen this approach in Chinese investment into Australia’s health care sector in the past.”

  • Local knowledge

    “M&A in the local market is driven by local players who are attuned to nuances and can respond quickly to local opportunities.”

Li believes there are huge and immediate opportunities in outbound investment in aged care, particularly in China where 240 million people will be aged 60+ in 2020. However, aged care in China will have its challenges.

What will this mean for aged care operators?

  • eHealth will alter the aged care landscape, creating opportunities for digitally advanced operators to leverage the broader health and wellness ecosystem.
  • OpCo PropCo deals will become more prevalent as investors seek to dissect portfolios and leverage revenue streams from beds.
  • Digital home care models are likely to be developed in Asia, but Australian aged care operators will have opportunities to leverage their experience and IP to move into niche areas in the Asian market.
  • China will yield massive opportunities for outbound aged care investment.