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Tuesday, 14 June 2011

Do as I say, not as I do

Yesterday, listeners to the Today Programme had to put up with John Humphreys haranguing the Chairman of Southern Cross, the troubled care home provider.  This was never going to be good news for the nursing home magnate, who was introduced as the unacceptable face of capitalism, a standard BBC epithet for the private sector.

The main course of the other Welsh windbag's attack was that Southern Cross had erred in selling and leasing back many of its care homes.  The businessman gave sensible replies to the effect that it wasn't in their businesses interest as a service provider to have its resources tied up in assets, to have large corporate debt facilities that would have to be refinanced en bloc when the operating margins of the business (93% occupancy good, 85% occupancy bad) meant that they needed to have flexibility in their asset base.

All of this was of course lost on the Cambrian fool who continued to spout his Socialist mantra and suing from the union hymn sheet, but it will come as no surprise that later in the day, the BBC announced that they very property from which the Today programme is broadcast is being put up for sale on a sale and partial leaseback running for the next 4 years giving the BBC operations the flexibility in relocation.

The BBC currently owns 585,000sq metres of property in Britain across 483 locations and wants to cut its property holdings by 30 per cent. Richard Deverell, W12 programme director, said: 'Television Centre has played an extraordinary and central role in the history of the BBC, which will not be forgotten. Our primary aim of the sale is to maximise the value to the BBC and licence fee-payer whilst ensuring the teams and operations based there are successfully relocated.'

Spot the difference.


Bill Bell said...

Surely the problem is that sale and leaseback releases a load of cash at execution which is then bled out of the business/BBC/country over the lifetime of the lease.

Given the landlords are generally given guarantees of occupancy in these arrangements I don't see them adding any value in the public sector other than to provide a short term cash infusion which can be taken back over the long term (usually at commercially unviable rates).

Southern Cross was/is a disaster, quasi-public sector services gobbled up by debt addled private equity firms, skinned for all assets, recycled back to the 'public' markets and then back into state arms eventually (probably).

Watch what happens if/when they load Alliance Boots with a ton more debt and toss that back into the public markets.

Alex said...

Depends on a number of factors:

1) How much gearing was secured on the properties before the sale / leaseback,

2) How much prepaid rent/ security is required under the leaseback

While some cash flow may have been created because of the appreciation of property values, there is no indication that was the case, and having created the group through acquisitions, presumably most of it with debt finance on properties, it is likely that the sale and leaseback produced very little cash.

The main advantage of the leaseback would be the flexibility and the lack of need to have equity tied up in the properties.

Provided the company could get recent 5 to 10 year rental agreements, then it simply operates the homes, collecting money from the government, paying for care services, heating, food, rent etc, which is a simple business. A nice simple business.

Bill Bell said...

'Flexibility' to do what exactly?

Release 'equity' tied up in the business as physical assets, turn it into ready cash. You reduce the overall size of the business through a shrinkage of it's real assets. Realise the value in the under-valued assets. Pump those values up higher through guaranteed rental agreements (because banks were financing anything at stupidly low rates) which can then be extracted from the business in the form of 'special' dividends.

It's pure financial engineering (which is what 95% of the value-add in Private Equity is). There is a place for this. However given the massively negative social consequences this should be externalised from social industries and the traditional banking sector.