Nord Anglia Education's swoop to buy 28 Jigsaw nurseries for 13.25m on 28 May - the day when directors of that ailing chain called in the administrators - has made it the largest UK nursery group, following its acquisition of Leapfrog's 39 nurseries last month.
While Nord Anglia acquired Leap- frog in its entirety, including a top management team which it regards highly, it has cherry-picked the 28 Jigsaw nurseries, leaving eight to be disposed of by the administrators, accountants KPMG.
A KPMG spokeswoman says, 'We sold 28 of the nurseries on the day Jigsaw went into administration as part of the administration process. Regarding the eight remaining nurseries, we are in negotiations at the moment with interested parties. We are obliged to report back to creditors within three months of being appointed.' She declined to comment on Jigsaw's debt levels, but added, 'Generically speaking, if companies are not able to pay their creditors, administrators are called in.'
The 60m Leapfrog deal was ratified nearly unanimously by Nord Anglia shareholders at an extraordinary general meeting last Wednesday (9 June).
The two purchases have propelled Nord Anglia from eighth position in the Nursery Chains league table of nursery owners in 2003, when it had 2,610 places, to undisputed market leader with 9,600 places in 101 nurseries. Its Princess Christian Nurseries division had recently acquired the Petits Enfants group, adding nine more nurseries and 527 places.
The scale and speed of the latest transactions have not caught its competitors off guard. They recognise that, as a public company, Nord Anglia has the financial clout to raise the necessary cash, and that both Jigsaw and, to a lesser degree, Leapfrog, were ripe for takeover, as each of them were reported to have had debts of more than 30m by March 2003.
Nord Anglia paved the way for these acquisitions by signalling the sale of its UK independent schools business, which its chief executive Andrew Fitzmaurice says is at 'an advanced stage'. In addition, the company runs an International Schools business and a range of outsourcing businesses, including a large chunk of the UK careers service for 14- to 19-year-olds, and an army foundation college in Harrogate as well as school inspection and training operations.
Mr Fitzmaurice says, 'From a structural and strategy point of view it makes great sense for Nord Anglia to have a dependable, steady return, asset-backed UK-based business at the centre' to complement the international schools operation, which has 'some operational risk', and the outsourcing business, which is 'very dependent on Government policy'.
Emphasising that Nord Anglia has 'no plan to close any nurseries at present', he says, 'We are acquiring some great operating practices in Leapfrog. They have an excellent model in the way they manage the nurseries. Their key performance indicators of occupancy and staffing costs are all very good. They run a real quality operation right the way through.
Jigsaw has some very strong operating practices, some really well-run nurseries.'
Nord Anglia is retaining the entire Leapfrog management team and Jigsaw's regional managers. But Mr Fitzmaurice says that while talks are continuing with some of Jigsaw's operational managers at national level, Nord Anglia has not taken over the Jigsaw head office. He says that while the nurseries would continue under their existing brand names, the aim eventually is to place all of them, including the Princess Christian nurseries, under the Leapfrog brand.
It's a deal
The 28 Jigsaw nurseries, which had a turnover of 15.2m in the year to the end of March 2003 and made a profit before interest and tax of around 0.8m, were bought for about 13.25m, much less than the 60m Nord Anglia paid for Leapfrog in May. Nord Anglia said the lower price for Jigsaw facilities was because only one of them involved the freehold; the rest were on a leasehold basis.
It is funding the Jigsaw acquisition with a 14m loan from the Allied Irish Bank, while it is raising 23m through a share placing and Pounds 39.6m through a bank loan to pay for Leapfrog.
Mr Fitzmaurice says Nord Anglia will not be taking on any existing debt from either group. 'We valued the nurseries at a certain amount and any debt is for the vendors to sort out,' he adds.
The sale of Jigsaw will come as a relief to venture capitalists 3i, which obtained a controlling stake in the Milton Keynes-based chain in a management buyout in 1998. It is reckoned to have invested a further 20m by the end of 2001. In a statement, 3i said the sale of Jigsaw nurseries 'provides a good result for 3i at this time'.
But the director of another major nursery chain says that 3i had been trying to offload Jigsaw for some time. '3i put in a hit squad to try and turn it around. They will have looked at this as a fire sale,' he adds.
Faulty strategy
Philip Blackburn, an economist at healthcare consultancy Laing and Buisson, says both chains were 'guilty of expanding too quickly'. He thinks their strategy of developing purpose-built new nurseries had proved a financial burden with high start-up costs, while Jigsaw may never have recovered from the adverse publicity following the death of a child at one of its nurseries.
Leapfrog, which was backed by a consortium including UBS Capital, European Acquisition Capital, Foreign and Colonial and Commercial Union, had twice tried to float on the stock market but was shunned on each occasion by the City.
Alan Bentley, director of the Childcare Corporation, says the failed flotations indicated that 'there is no appetite in the City for a stand-alone nursery company that is still showing losses and with an uncertain future'.
He says Jigsaw's strategy of building nurseries in business parks had been conceived during an industrial boom but, by the time they opened, the dot.com boom had turned to bust and 'the nurseries came into dead business parks'.
Mr Bentley says that the purpose-built nursery strategy, which the Childcare Corporation has also embraced, does have the benefit of an ultimately low unit cost, but the start-up costs are greater and 'the lead time between a nursery opening and becoming operationally profitable has been getting longer'.
Acquisitions and mergers
However, despite the gloom surrounding the plight of Jigsaw and Leapfrog, some leading figures in the nursery sector have welcomed the Nord Anglia takeovers as a sign of strength and predict that the process of mergers and acquisitions will now gather pace.
Stewart Pickering, a director of Kidsunlimited, which recently took over Kindercare, says, 'There are too many medium-sized operators, with between five and 20 sites, and I feel the time is right for those to be snapped up by bigger operators. There is a lot of scope for change, and given four or five years, I think we will see a couple of companies listed on the stock market.'
Martin Pace, a director of Dolphin Nurseries, says, 'It's a good thing from the industry's perspective and it gives significant comfort to other players. If nothing was happening it would make everyone nervous, because it would show a stagnant sector or one that was going through a difficult phase.'
Phil Rhodes, chief executive of Asquith Court, which was the market leader until the Nord Anglia deals, says, 'They have significant management tasks in blending three quite large businesses, and they are doing it in the eye of the public investor. I wish them every success, because they are representing the sector in the public market.'
For Alan Bentley it is a case of Nord Anglia now having 'reached a critical mass which, as long as they can consolidate, will give them the ability to make further acquisitions'.
Certainly, after the experience of Leapfrog and Jigsaw, growth through acquisition rather than new purpose-built nurseries will largely be the order of the day for the major chains. But who will be next?.
Further information
* Nursery World's supplement Nursery Chains was last published on 3 June 2004
* The most recent Chains league table appeared in Nursery World, 10 June 2004, page 4
