In review - What the Childcare sector has seen in H1 2016

Over the past year, we have seen significant activity across the UK day nursery sector, with an increase in acquisition enquiries, nursery inspections, market appraisal requests and transactions.

During the first half of 2016, the market remained incredibly strong which was largely due to the appetite of buyers, lenders and investors, teamed with an increase in owners deciding to exit. In most cases the execution of an owner’s exit strategy is principally due to their desire to pursue retirement plans. However, the buoyancy in the market has also enticed some owners to sell their businesses earlier than they had originally planned.  

One very apparent trend was an increase in the number of groups, and owners of high quality single assets that received unsolicited direct ‘off market’ approaches from trade buyers and investors expressing their interest in entering exclusive acquisition negotiations. While incredibly flattering, when owners do enter such negotiations they are often prohibited from being able to test the market to determine whether other potential buyers would firstly, pay more than the price being offered and secondly, be able to source a potentially more suitable and better-placed buyer.

Many of the opportunities which Christie & Co have been called to advise on this year have been subject to very strong interest, multiple offers and speedy completion processes. The most successful sales processes for both groups and larger single asset sales are those that are presented to the market in confidential sale campaigns and where the opportunity is realistically priced therefore resulting in competitive bidding.  

The UK nursery sector continues to be highly fragmented and we have continued to see an increase in demand from national and regional nursery groups seeking to expand their businesses via acquisitions and organic developments, as well as increased enquiries from early years operators, investors and overseas buyers.

Eager buyers continue to principally seek high quality freehold or leasehold settings with a minimum of 50 places, which can demonstrate proven and established levels of EBITDA and present opportunities for further development. They also look for assets which have been subject to ongoing capital expenditure, enjoy Good or Outstanding Ofsted outcomes, and those which employ a highly qualified, well remunerated and autonomous workforce.

From a regional perspective, while there continues to be high demand across the UK, the greatest area from buyers continues to be across the South West, including the Home Counties and London. This demand is driven by the high fee levels that some settings are able to achieve across these regions.

The most highly desired assets are those which are held on unencumbered freehold titles or assets which are leasehold on leases which are inside of the Landlord and Tenant Act, with rents which are either at or below market rent, and businesses which can demonstrate solid sustainable earnings.  

Buyers are sophisticated and while there is high demand for quality settings, they are continually mindful when considering the longer term potential impact that the living wage will have on the businesses they are contemplating acquiring, as salary expenditure is the largest operational cost of any nursery business.   

Owners and buyers alike are increasingly thinking about the introduction of the 30 hours ‘free’ entitlement  which is planned from September 2017 - however because there are so many unknown quantities and variables yet to be determined, this makes it incredibly difficult to accurately forecast the overall impact on the market and the prices that buyers may be willing to pay.

At the NDNA Annual conference on 1 July 2016, Sam Gyimah was asked whether, as a result of BREXIT, the introduction of 30 hours could be under threat.  While his answer was a resounding no, we are of the opinion that this should be closely watched. The triggering of Article 50, and the process for the UK to start untangling itself from EU legislation will be costly in both professional negotiation and legal fees. Such costs, for which there is currently no budget, will need to be met, and with 30 hours yet to formally commence, the pledge made by the Government as part of its manifesto could potentially become a Brexit casualty.
Going forward into the second half for 2016, it’s going to be an interesting time for the childcare and early years sectors. The industry is facing a number of pressures, not only from the Brexit fallout, but from the continuing impact of the National Living Wage and a shortage of qualified staff on the coalface. It will be a testing time for operators, both corporate and independent, but with careful planning good quality businesses will continue to go from strength to strength.