Cable to probe Southern Cross-style buyouts

By Rob Davies for the Daily Mail
Updated: 02:59 EDT, 7 June 2011

The plight of stricken care homes firm Southern Cross following its time in the hands of buyout house Blackstone has triggered a probe by Business Secretary Vince Cable into private equity ownership of public service providers.

Public concern: Vince Cable admits Southern Cross crisis is 'shocking'

Speaking as Southern Cross promised to flesh out its survival plans next month, Cable admitted the financial hurricane engulfing Britain's biggest care home operator was a 'shocking state of affairs'.

'I've asked my department to see whether there is an underlying problem with private equity companies supplying public services,' he told a conference of the GMB union.

He said the department had taken the 'provisional' view that regulators were responsible for investigating the matter but pledged to see 'whether we can pursue that further'.

Critics say Blackstone - which made an estimated £1bn on its investment in Southern Cross - failed to address the disastrous 'sale and leaseback' model, under which the company sold care homes to landlords, only to rent them out again.

This enabled the firm, which looks after 31,000 residents in 753 homes, to grow more quickly.

But it left the company (down 0.45p to 5.85p) contractually obliged to pay rising rents to its landlords, even as revenues were ravaged by public spending cuts.

Blackstone insists it did not instigate the sale and leaseback strategy, but has not said why it pressed ahead with the model and even boasted of its success in the float prospectus.

William Laing, director of healthcare consultancy Laing & Buisson, said sale and leaseback deals were not inherently dangerous, but might have been poorly administered.

'In retrospect, the deal went wrong,' he said. 'There's nothing wrong with sale and leaseback, its more about whether all of the risks are factored in and there are reasonable rental rates at the outset.'

Sources close to Blackstone insisted no-one could have predicted the scale of public spending cutbacks.

Investors will get the chance to quiz Southern Cross at a special meeting on July 12 where management will update them on plans to sell off some 200 care homes to rivals, just days after unilaterally slashing rent by 30%.

Cable's contribution came hours after the GMB released a report naming the 'greedy' and 'gullible' investors in the firm's £175m float in 2006.

The list included Prime Minister David Cameron's top civil servant Jeremy Heywood, cohead of investment banking at Morgan Stanley when it acted as joint co-ordinator on the float.