The healthcare group Netcare announced on Wednesday that it would leave the UK after it couldn’t secure lower rent for its hospitals. Also, its UK lenders are forcing it out.
Netcare first invested in General Healthcare Group (GHG), whose operating company BMI Healthcare runs 59 private hospitals in the UK, in 2006.
For the past year Netcare has been in negotiations with Theatre PropCo, the owner of 35 of the hospital properties, to get them to lower their rent. Its rental costs were equal to a fifth of its UK revenue in 2017.
But in a statement released on Wednesday, Netcare said it now recognises that it is "highly unlikely" that it will secure low enough rent that will allow BMI Healthcare to remain competitive. It is now looking for buyers for its UK operations.
Netcare CEO Richard Friedland said in a statement that the rental agreements were initially considered market related. It was agreed that rent would escalate at a fixed 2.5% per year. “However, following the global financial crisis of 2008, the accompanying declining private medical insurance demand, and the sustained period of exceptionally low inflation in recent years, BMI Healthcare’s rent obligations have grown to be unaffordable.”
In addition, Netcare is in a tight spot with its UK lenders. In December 2017, it concluded a short-term loan of an estimated R331 million (£20 million) with creditors to support the UK business. The loan expires at the end of the month, and any further lending was dependent on Netcare giving up its control of the BMI board.
“Netcare has agreed, in the interests of the business, to accede to this demand,” Friedland said.
The BMI business has been under pressure after the UK’s National Health Services decided to reduce elective surgery, which was often done by private healthcare providers. As the UK economy remains depressed, demand for private healthcare has also waned. BMI suffered an operating loss of more than £20 million in the year to end-September.
South African investors were growing nervous that money from local operations would be used to prop up the UK. That would explain why Netcare’s share price jumped more than 7% to R26.92 following the news of its UK exit.
Netcare has always ring-fenced its respective businesses in SA and the UK. As such, the debt obligations of BMI Healthcare do not have recourse to Netcare and its South African operations, said Friedland.
“Just as our investment in the UK market made good sense at the time, so too we believe that the decision to exit that market is in the best interests of Netcare shareholders.”