What will social care M&A look like in 2025?
Health and social care experts seem somewhat unconvinced that recent sector shocks will translate to a glut of social care M&A.
The national insurance and national living wage rises, alongside inadequate local authority fee increases, could lead to the closing of nearly a quarter of care businesses – with some saying the figure could be as high as 30%. There are questions as to how much this will translate into sales.
Several sources suggest it is much more likely that big platforms will be broken up and sold as roll ups to bigger firms rather than sold in their entirety. Those with ageing or poor-quality assets may not find a buyer at all. Profitability will also be a consideration. With the cost increases set to have a huge impact on bottom lines, some buyers may hold off even if the companies’ financial situation forces them to sell.
Monica Macheng, corporate partner at Hill Dickinson LLP, says: “We’re seeing a timetable that is suddenly slowing down because we have buyers who want to try and get some greater visibility around the impact of those increases. This could lead to some buyers revising their evaluations later in the year.”
Macheng believes Q1 will be a likely high point for health and social care M&A more widely, with April 2025 seeing capital gains tax on assets with business asset disposal relief rise from 10% to 14%.
She explains: “A lot of SMEs and owner-managers will probably look to exit ahead of that deadline. A lot of exits have been premised on certain relief still being available, so I think they will accelerate their exits so as not to be caught by that change.”
The confirmed volume of UK healthcare M&A in 2024 was £1.6bn, short of the roughly £2.4bn in 2022. One source has previously suggested the end of year figure could be £2.5bn-£3bn, but this now seems very optimistic.
The impact on the healthcare market more widely
The disappointing 2024 environment led to phantom processes according to Paul Tomasic, head of European healthcare at Houlihan Lokey. He explains: “Over the last 18 months we’ve had a period of ‘non-process’ processes. People have been putting out assets with soft bid deadlines, and essentially saying that they were ready to sell but not putting much time pressure on the prospective buyers.
“I think they did that because they didn’t want to have the stigma of a failed process, which is obviously more likely in a quiet market. So, the logic was to give the buyer a large amount of flexibility. I don’t think that worked out however – the buyers were never comfortable without deadlines and momentum in place.
“More recently however we are seeing true preparation with early drafting of IMs, financial and commercial due diligence, etc. I think everyone is still waiting to see how the market will play out, so I’m not expecting a huge flurry of activity, but there’s an intentionality in how sellers are approaching it this year.”
Macheng adds: “Healthcare M&A has had a challenging couple of years for much the same reasons as every other sector. There was Brexit, Covid, high interest rates, and geopolitical uncertainty. But I think having the election relatively early in 2024 has given us the opportunity to appear more stable – and this is important because uncertainty kills M&A activity.
“Of course, there are still challenges going into 2025. There is still a lot of talk around profitability, which is going to have an impact on business valuations. But I think there is a lot more confidence in the market, and there are a lot of funds who have held on for longer than they initially wanted to who are now looking to sell, and also funds who need to deploy capital.”
However Caring Times also understands there is still an aversion to risk in the market with the Bank of England base rate sitting at 4.75%. One source says: “Debt definitely isn’t free anymore, which means it has to be paid back more quickly and people in the market are basically thinking “okay, can we achieve our growth plans in four to five years with the current environment?”. Nobody really wants to wait seven years.”