What\’s going to happen to Southern Cross?

Well, obviously, I don\’t actually know, but I can give a sketch of what\’s likely.

The basic situation is that Southern Cross operates but does not own a series of nursing homes for the retired/elderly.

30,000 odd residents, 45,000 odd staff.

They\’re in a squeeze. The major customer is the local authorities, who have a duty to provide such elderly/nursing care. The LAs have reduced the inflow of new clients by some 15% over this past year.

And as Southern Cross doesn\’t own the buildings, they obviously have to pay rent on them. Their leases have a 2.5 % a year rental uplift in them.

So, as a basic business problem they\’ve got high and rising (staff and rents) costs and declining income. In a low margin business this is of course something of a catastrophe.

They need to a) negotiate those rents down, b) get more capital to cover the losses or c) go bust.

There are more complex alternatives, like issuing shares to the landlords in lieu of rent, even to purchase the underlying freeholds.

OK, so, but what\’s going to happen to those 30,000 residents?

My best guess is, not a lot really. These are all purpose built homes. They\’re useful as residential homes for the elderly and not a lot else. Even if Southern Cross does go bankrupt, the buildings will still be used as residential homes for the elderly under some other financial arrangement. At lower rents, which is why sure, the shareholders have a problem, but so do the landlords.

Which is why some sort of deal is likely.

8 comments on “What\’s going to happen to Southern Cross?

  1. “The LAs have reduced the inflow of new clients by some 15% over this past year.”

    Indeed, and the inflow will decline further, as local authoritities realise that about a third of “low dependency” residential care cases could be looked after more cheaply elsewhere by other providers filling the gap between residential care and sheltered housing.

    Additionally, care providers make little profit on local authority placements. In effect, self-funders subsidise the local authority beds; and self-funders will go elsewhere if Southern Cross looks to be in trouble.

  2. The other possibility is to relax the regulations on the number of staff needed, to bring their costs down.

  3. But yes, most likely options are:

    a) the plug’s pulled on Southern Cross, they default on their leases, and other operators are brought in by the landlords to operate the homes with the same tenants (at least on a short-term basis);

    b) the landlords decide that they won’t make much money on (a), so agree to some sort of restucturing.

    Essentially this looks like the same problem that Regus had years ago – you’re tied in to long term leases, but your income comes from sohrt-term serviced leases, so you’re very vulnerable to a down-turn in demand.

  4. Richard,

    That was actually my first thought. Well, sort of.

    I realise we’re talking frailcare here, but 1.5 staff members per patient strikes me as a rathere high number. FFS If I remembers correctly, luxury cruise liners work on a ratio closer to 1 for 1.

    After I fired the numptie who signed the original leases, I’d also look at renegotiating them. I imagine that faced with the prospect of having to look after a bunch of OAPs and finding new tennants they may well be amenable to a lower, more market related annual increase.

  5. Update:

    A little googling reveals that a crew to passenger ratio of 1:2.5 is closer to the mark. And that’s to run a ship which has issues no Southern Cross staffer has to worry about*.

    *Stuff like effoff big engines to keep going and even efferoffer icebergs to miss.

  6. I thought they were all forecasting an increase in supply in the form of ageing baby boomers?

  7. Southern Cross ramped up valuations to over a billion pounds at the hight of the big hype and sold shares at £4 a pop. Today worth 00 .8.3p. Top executives layers of mis mangagers badly run homes, complaints and investigations into bad practice makes Local Authorities reluctant to refer to some bad homes, not all Southern Cross homes are badly run but the image is tarnished. High rents the company has been run by the top managers for the top managers and not for those who live and work the at the face.
    Within the next 2weeks administration will be the outcome

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