Good for the long term

A wise ability to look at the long-term view has helped Philip Burgan steer his care homes group through all the troubles the industry has seen recently. Peter Baber reports.

The most strait-laced, double-breasted, pin-striped businessman would probably die before admitting it, but it’s true – business investment can at times be as subject to the whims of fashion as a woman’s hemline.

Nothing illustrates this more than the attitude to the care homes sector in this country. Half a decade ago it was an industry (if you can call it that) that could do no wrong. Banks and investors were falling over themselves to lend money to it, and landowners suddenly found another ready supply of would-be developers willing to pay way above the going rate.

Much of this enthusiasm was bolstered by companies like Southern Cross, which had even been through a flotation, so great was the demand of people to invest in their success. The rise of the industry was inexorable, we were told, because the UK population as a whole was getting older, and so more people would need care.

The small matter of how this care was to be paid for was usually overlooked. Now cue forward five years and a very different picture emerges. Southern Cross pulled out of the industry in July last year, leaving 31,000 people who relied on its care in the lurch, and not before questions had been asked in the financial press about the amount of money its directors had been taking out of the business.

Last autumn saw the airing of a BBC Panorama programme detailing shocking abuse at a care home for people with learning disabilities run by Castlebeck. And then in December a House of Commons Select Committee report warned that there were still far too many elderly people at risk of neglect in care homes run by an overstretched industry.

Hanging over all of this is one big unanswered question – how are we to pay for our care in old age? When the Dilnot Commission on long-term care suggested last summer that a personal cap of £35,000 should be put on everyone’s long-term care costs, there were widespread claims that even this was too high.

So where is the money to come from? Philip Burgan, chief executive of the Maria Mallaband Care Group (MMCG), is familiar with these issues.

And he admits the industry has something of an image problem. He says he was ashamed to be working in the same industry as Castlebeck when he saw the Panorama programme.

“I sat next to Princess Alexandra at a lunch at St James’s Palace the other week,” he says.
“She had clearly done her homework, but her perception was all bad, and quite rightly so.” Fortunately he managed to persuade her otherwise, to see that there are examples of good practice in the industry, and of success. And chief among these must be his own Leeds-based company.

Starting from a base of running just four care homes in 2002, it runs 142 today, both in care for the elderly and care for autistic patients. It has also taken over 36 of the homes that were being run by Southern Cross, doubling the company’s turnover to around £100m and taking headcount from 1,500 to over 4,000.

He says his initial impressions of his new acquisitions have confirmed some of the claims that were being made about how Southern Cross’s financial problems were affecting it standards.

“You can’t believe how badly run they were,” he says. “In Scotland, some of the homes hadn’t had a visit from an area manager in six months. As for the fabric of buildings, they were saving the pennies and missing the pounds. If you had two washing machines and driers, for example, and one pair went down, you would find that they wouldn’t repair them because you still had the other pair, even when the fault was something that doesn’t cost much to repair.

"And everything had to go to head office for approval. They were not using local people.
One home had both its boilers go down on Christmas Eve, but they couldn’t use the local plumber. So the residents had to wait for four days with no hot water or heating until the Southern Cross-designated guy was back on call to drive the 180 miles to fix it.

“They even had a handyman who wasn’t allowed to go up a ladder because of health and safety. When I walked into the home where he worked, the foyer had five bulbs in the ceiling, and four of them were out.” He had in fact already decided to hive the 36 new homes into a new vehicle called Countrywide Care Homes.

“I didn’t want to taint the MMCG brand with a load of variable quality care homes,” he says.

“I wanted to create a value brand.” By “value” he insists he means homes that may not be as luxuriously decorated and furnished, and may be in less desirable locations, but have an equal dedication to care.

“The standard of care will be equally as good,” he says. But he could see the trouble Southern Cross was heading into from many years ago, he says.

“Southern Cross outbid me so many times and paid unsustainable prices. The chickens have now come home to roost.” He thinks the whole investor excitement about care homes could actually have been sensibly dampened down if people had bothered to sit back and take a wider view. Taking long-term angle in business generally is something he is very keen on.

“I have always taken a five- to ten-year view,” he says. “The private equity hype was all based on demographics, but actually they have been flat for the past five years.

They only started going up this year, and the famous ‘J’ curve doesn’t start going up until 2014.” And, as ever, there is the matter of how the continuing care business is to be funded.

It was Burgan’s long-term pessimistic view of this that caused him to move MMCG largely out of providing social service-funded care as long as six years ago.

“In late 2005 I took a step back and looked at the market,” he says. “Even then, prices were starting to overheat. But I couldn’t see how the social service model was going to work, as the large rises in local authority fees we had seen at the start of the decade were starting to slow off, but inflation wasn’t. I thought ‘That’s not really going to work’.
So between then and 2008 we started selling off homes for elderly care, only buying and building within affluent areas.”

The elderly care business within the company is now 70% private funded. Burgan says he was particularly cautious over what was happening in the market because he has seen it all before. At the turn of the century, many care homes operators had sold up and left the market because the new Labour government was introducing care standards while the fees local authorities were paying were dwindling.

But then local authorities had changed tack and the beginning of the century had seen substantial fee rises.

“Since 1997 the minimum wage has more than doubled,” he says, “but local authority care home fees have only gone up by 50%. Sooner or later someone is going to realise this and we will all go back to 1999, and suddenly see ringfenced money and local authority fees rising 6% or 8% – but only for a short time. I don’t want to go down that rocky road again.
I want to organise my own fees.”

It seems incredible, then, that Burgan is even considering going back into the social service-funded market at all, as he is now considering doing with Countrywide Care Homes.
In fact, if, as he claims, the fees local authorities were paying for care were at least £100 a week less than what it costs “to do the job properly” even before the latest public sector cutbacks, what person with a sane business mind would want to enter such a market? Burgan says it does make sense – if you get the timing right.

“You make profit with difficulty,” he says. “The only way we make it pay is because the entry price is so low. For example, we are not going to pay £300,000 in rent, so we will renegotiate rents on coming in and pay £150,000 instead. A lot more smaller Southern-Cross-type businesses will go bust, and that will be my opportunity.

Supply and demand will come more into kilter, so there will be fewer bed vacancies, and then demographics start to kick in 2014. By that time we will be approaching a new election, so perhaps there will be more money around to give people a feelgood factor.
In the meantime we can improve those businesses.  Some of them are overstaffed with administration staff.

Certainly with the businesses we have bought so far, the numbers stack up on the day we have bought them.” This long-term thinking is no doubt part of the reason for the success of the first business Burgan built up, the Medimart retail chemist chain that he successfully sold to German firm Gehe in 1995.

He is a pharmacist by training – although he says he soon grew tired of doing the actual pharmacy. “You are stuck in a room, and a piece of paper comes in and you process it.
That’s it for 40 years.”

Fortunately a short subsidiary course on business he did as part of his degree enthralled him, so he tried his hand at management. By the age of 29 he was managing director of larger chain at 32, but two years later in 1986, having become disenchanted with a boss he felt was too gung-ho, he left there to set up what became Medimart.

He decided to sell out in 1995, however (by which time the gung-ho boss had come a cropper in the early 1990s property slump), because, again, he could see changes on the horizon.

“All the value in running a pharmacy chain was based on the licence,” he says. “But at the time the Government were talking about derestricting the industry completely. All the money I had was tied up in that business. As it happens those changes never came, but I sold right at the top of the market at the right time.”

After a brief hiatus, during which he lost £1m trying to run his own venture capital fund but made the same amount back on property deals, he decided to acquire four care homes in the late 1990s just as an investment.

He brought a manager in to run them, and then spent some years fulfilling a dream to be an international rally driver. Only after that did he consider the care homes business worth developing. He says: “I bought four more homes, extended them, and then caught the rise in equity as the market was also going up.” MMCG now, however, is a very different animal from Medimart.

For one thing it is much bigger: he never employed more than 250 people at Medimart.
As a result, he has had to part company with some management people who have worked with him for many years, because, he felt, they were not up to running a bigger organisation.

His management team now includes both his son and his son-in-law, although he insists that they have earned their positions on merit and there is no succession in the wings.

“I hate nepotism,” he says. The changes have also meant that he has had to take much more of a “helicopter” view of his business. But even at the age of 60, that hasn’t dimmed his enjoyment of it.

“All my friends are retiring,” he says. “I met two college friends at a retirement party recently. They were both still pharmacists and I thought, ‘Why am I sat with these two old men?’ But then I realised I am just as old as them. Perhaps it’s my outlook on life. I like doing deals, and I have never enjoyed business as much as I do at the moment.” It’s certainly a good position to be in.