Terra Firma’s £825m acquisition of UK’s largest care homes business will render shares in the group worth little or nothing
Guy Hands, the tax exile and private-equity baron best known for his disastrous debt-fuelled takeover of EMI, is poised to snap up Britain’s largest care home chain after a massive write-down by the government on its share of the business.
The deal will see one of Hands’ Terra Firma funds take over Four Seasons Health Care, which was prevented from going bankrupt by the state-owned Royal Bank of Scotland in a £825m rescue deal.
It will be Hands’ second major coup in as many months, and demonstrates a dramatic switch in his investment focus – away from building EMI-style aggressively-indebted buyouts to preying on such transactions when they have fallen into distress.
Driving a hard bargain, the Terra Firma purchase of Four Seasons will render shares in the group – almost 40% of which are held by RBS – worth little or nothing. Lenders too will be forced to book heavy write-downs, with debts cut from £780m to £525m.
The deal will mark the second time Four Seasons has been through a corporate meltdown since an ill-fated £1.4bn buyout six years ago, arranged by financial engineer Paul Taylor’s firm, Three Delta, on behalf of a Qatari sovereign wealth fund.
The firm’s two debt crises echo distressed scenes elsewhere in the care home industry, which, before the credit crunch, was a favourite hunting ground for private equity. The most high-profile business to unravel was stock market-listed Southern Cross Healthcare. Unable to pay rent bills, it was forced last year to hand back the keys to landlord groups – Four Seasons among them.
It is hoped, with reduced borrowing, Hands can demonstrate the latest incarnation of Four Seasons has been structured with sustainable levels of debt. His third Terra Firma fund, which raised €5.4bn before the credit crunch, is injecting about £300m of fresh equity in the business, with RBS at the same time reinvesting to take a small interest.
The deal follows Terra Firma’s rescue last month of The Garden Centre Group, another debt-laden business which had been lying, in intensive care, on the balance sheet of fellow state-backed lender Lloyds Banking Group. Lloyds, too, was forced to take a heavy write-down on its controlling holding in the business in order to exit.
Four Seasons, which looks after 25,000 people in 500 homes, is struggling under debts of £780m, with a September deadline for substantial repayments looming. The likely deal with Hands follows a long hunt for a white knight investor to take the troubled business off the bank’s balance sheets. Others who had shown an interest reportedly included private equity groups Bain Capital, CVC, Formation Capital, as well as a firm belonging to Hong Kong billionaire Li Ka-shing.
RBS and other lenders had been forced to take control of the business, and write off about half the value of loans, in an initial emergency refinancing three years ago. The Qatar Investment Authority (QIA) had walked away from an in effect worthless shareholding, leaving the lending banks to salvage what they could.
The Qatari foray into the UK care home sector had been fraught with problems and the QIA also eventually gave up on another Taylor-orchestrated buyout, the £1.2bn acquisition of NHP, once a sister company to Southern Cross. Taylor and the QIA later stopped working together.
The takeover of Four Seasons and The Garden Centre Group puts Hands back at the forefront of City deal-making activity, such as it is in the current recessionary environment.
His reputation took a battering after Terra Firma’s £4.2bn takeover of EMI in May 2007. The business was eventually handed over to Citigroup, which had lent much of the money used to fund the buyout. A subsequent attempt to sue the bank for “fraudulent misrepresentation” was described by a New York judge as little more than “a cat fight between two rich companies”, and the jury found in the bank’s favour.
For the past three years, Hands has been living in Guernsey, in effect a tax exile from the UK. He is one of Britain’s foremost financial engineers, beginning his career in the early 1980s at Goldman Sachs, including a spell in the US where he learned about a form of debt raising called securitisation, which involves long-term bonds being issued, backed by cashflows from company assets.
Hands became one of the first to introduce these new methods of raising takeover financing to the UK when he moved to the London office of the Japanese bank Nomura. Trends for buyouts built on securitised loans eventually evolved into the private equity boom of the noughties.