Nursery Chains: Business - Good buys

Although the sector has spent the year navigating various challenges, including the recent introduction of the national living wage (effectively a new wage floor for the over-25s) and the run up to 30 hours of free childcare, increased government support in its funding and ongoing demand from parents for provision is also helping to position the sector as a good bet for investors.

Courteney Donaldson, head of childcare at Christie + Co, says it has been an ‘incredibly busy year’. She adds, ‘During the whole year, from Q1 right through to Q3, there’s been a lot of market activity. Confidence among banks, investors and operators remains very high.

‘We’ve seen a number of portfolio [group] transactions. In the processes we’ve facilitated, we’ve had significant interest from a small selected pool of buyers and had multiple offers, and deals have been concluded in pretty swift timeframes.’

Redwoods Dowling Kerr has also observed an increase in market activity, according to the firm’s chief executive Paul Miller (see box, page 6).

EXPANSION THROUGH ACQUISITION

In terms of acquisitions, the biggest deal of 2016 was the Busy Bees purchase of Positive Steps, a group of eight settings in the South East of England, which the chain followed with the purchase of The Teddy Bear Club nursery in September. Other significant moves include The Co-operative Childcare’s acquisition of Birmingham-based First Steps (Nursery World’s Nursery Chain of the Year 2015) and Bright Horizons’ acquisition of the four-setting Little Unicorn Day Nurseries.

For Busy Bees, the purchase of Positive Steps and The Teddy Bear Club are the most recent additions in a year focused on growth. Since the last issue of Nursery Chains, the sector’s largest chain has also added Bush Babies (with seven nurseries and 430 places) and Kids 1st Day Nurseries to its portfolio, keeping it firmly at the top of our table with more than 24,000 places.

‘There are a number of areas in the UK that we are looking to expand within, which is based largely on supply and demand,’ says Busy Bees development director Steve Eccleston.

‘It goes back to when we opened our first nursery 32 years ago and we quickly realised that there were many parents in the same position, wanting or needing to continue with their career but could only do so if they could secure high-quality care for their children. That remains the case today.’

He adds that the business’s primary focus as it continues to expand is to develop what it calls a ‘national network of local nurseries – i.e., we are not a nursery chain where one box ticks all’.

He says, ‘This focus also underpins our international growth strategy. We are actively looking to acquire quality, well-invested, well-managed sites and will continue to buy on that premise regardless of the current market landscape.’

GROWTH STRATEGIES

The Bright Horizons purchase of Little Unicorn brought the chain’s number of nurseries to 217, and its number of places to more than 17,000. The acquisition also means that Bright Horizons now has a presence in the Canary Wharf district of London, supplying places to the needs of corporates – something HRC Law partner Mark Traynor, who advised on the deal, says is likely to be part of a more general movement in childcare.

He explains, ‘The location of Little Unicorns in Canary Wharf is outstanding and they’re good nurseries, but I also think that Bright Horizons saw a lot of untapped potential there – particularly as the future of childcare will include extended care for corporates with out-of-hours care for people, rather than just the usual 9am-6pm. I think Bright Horizons has seen an opportunity there to start providing serious services to those corporates that have people who work very long hours.’

For All About Children, which bought four-setting chain Nelly’s in Dulwich, London, the acquisition is the final stage in a six-year growth plan, owner Russell Ford explains.

‘We’ve bought 17 nurseries in six years,’ he says.

‘For a small group like us, privately owned and using our own money, that has felt like quite an adventurous journey. We’re very selective and only interested in acquiring nurseries that can be run to a very high standard. Nelly’s probably brings us to the end of our growth plans.

‘Never say never, and I wouldn’t rule out one or two more nurseries if any outstanding opportunity came along. But our plans now are to continue to work hard to keep improving standards and quality, and to consolidate all the good things going on in those nurseries.’

He says the group’s decision about whether to buy Nelly’s wasn’t influenced either way by current challenges within the nursery sector or the health of the market.

Treetops, meanwhile, acquired Yorkshire-based Kindercare in April, adding ten more sites and about 800 places to the group’s offering –propelling it into the top six.

Chief executive Charles Eggleston feels that now is a good time to invest regardless of sector challenges. ‘We keep a very keen eye on the market and the impact of changes driven by the Government as well as increasing customer expectations,’ he says. ‘While some of these present challenges for the sector to accommodate, great opportunities do exist so we are very excited about the future of the market. That’s why we invested in Kindercare.’

ATTRACTING INVESTMENT

Alongside a lively market in acquisitions, the sector has seen strong investment, with some new players entering the space. Foresight is among the investors making their mark, according to Mr Traynor. The company made its first investment in the childcare market in April, providing development capital for the four-strong (now six-strong) chain Poppy & Jack’s (formally Peekaboo) in North West England.

‘Foresight identified the opportunity to build a leading childcare group through a mixture of bolt-on acquisitions and new openings in a growing and highly fragmented market,’ says Lizzie Ryan, investment manager at Foresight. ‘The North West in particular is incredibly under-served by the larger chains. Poppy & Jack’s chief executive, Sarah Bellamy, has a highly commercial background and made the investment particularly compelling.’

As well as the fragmented nature of the market, Ms Ryan cites a number of factors that are helping to make childcare attractive to investors, including the fact that the ‘UK childcare market has grown significantly over the past decade and is now thought to be worth over £5 billion per annum’.

The sector, she adds, also has a number of positive underlying drivers: the highest number of working families in the country since 1996, a trend towards the use of nurseries rather than informal childcare from families and friends, and increasing government support for the sector because of the benefits to the UK economy. Indeed, she says that the 30 hours offer has made the market more attractive, ‘especially in the North West where typically there is less discrepancy between rates’.

Mr Traynor also highlights the fragmented market as a draw for investors. He estimates that about 70 per cent of nurseries in the UK are single site operated, with the biggest players such as Busy Bees and Bright Horizons still having only between 5 and 10 per cent of the market share, leaving plenty of scope for investors to come in and make an impact. ‘That’s why we’re starting to see a snowball effect,’ he says.

Another significant investment was secured in August by North West chain Kids Planet, which received £10m venture capital funding from the Business Growth Fund (BGF) to open five new nurseries over the next two years. Owner Clare Roberts explains that the agreement is mutually beneficial for both parties. ‘Financially it made sense to BGF and they could see we had the right business structure in place and growth plans as well. We could see that by bringing them it, it accelerated our business plan.’

The group has already identified and purchased the five new sites, which it intends to develop. There is a sixth acquisition in the pipeline. The investment from BGF has enabled Kids Planet to expand at a much faster rate than it would have been able to do otherwise.

‘We had already identified these sites prior to bringing in a private equity partner, but the process would otherwise have been much slower – it would have been a five-year growth plan,’ explains Ms Roberts. ‘It also means we have money set aside for acquisitions.’

She adds, ‘So I’m looking for acquisitions all the time, to see what’s out there and what might become part of our group.’

MOVING ON

So why are some chains selling up? Increased interest from outside investors may of course be one reason, but Christie + Co’s Ms Donaldson says there is a variety of motivations: retirement, spending more time with family, and ill health, for example.

Asquith, one of the UK’s largest nursery chains, which has this year been following a ‘fast-paced acquisition programme’, is currently looking for a buyer. The chain declined to comment on the move.

For former owner of Little Unicorn Kate Williamson, there was a combination of factors that led to the sale of her business. ‘I had taken Little Unicorn as far as it could go,’ she says.

‘A bigger chain could move the business forward in a way I could not. After 18 years and being a mother myself, it was time for me to focus on my family and its needs rather than the business I had grown. Bright Horizons shares similar philosophies to me and they have a good work ethic.’

She adds that the difficulties of the sector can also feed into the decision of smaller businesses. ‘There are factors that always make you question the sector, things like changes to qualifications, the ever-changing Early Years Foundation Stage and the introduction of minimum wage/living wage. All these can bring with them problems, and being a small fish in a big pond takes its toll.’

Looking ahead, it is also worth noting that we are yet to see the full impact of Brexit. But Mr Traynor doesn’t think it is anything to worry about, at least not immediately.

‘We won’t start to see any negative effects of Brexit, if there are negative effects, until the back end of next year,’ he says.

‘So I’m confident that in the coming six months, or 12 months even, we’ll still be seeing activity.’

And in general, the ongoing challenges are unlikely to slow things down, according to Ms Donaldson. ‘While both the potential impact of the national living wage and considerations around the 30 hours offer are very hot topics, they have not been of any detriment to market activity,’ she says. ‘We’ve seen a significant number of deals done this year already – and the market outlook is incredibly positive.’

MAJOR DEALS IN 2016

Busy Bees buys The Teddy Bear Club (September 2016)

The Co-operative Childcare buys First Steps (September 2016)

IPC Nurseries investment company buys Little Muffins Day Nursery (September 2016)

Kids Planet receives £10m in funding from theBusiness Growth Fund (August 2016)

Busy Bees buys Positive Steps (August 2016)

Bright Horizons buys Little Unicorn (August 2016)

Complete Childcare buys Yellow Brick (August 2016)

Busy Bees buys Bush Babies (May 2016)

All About Children buys Nelly’s (April 2016)

Treetops (below) buys Kindercare (April 2016)

Asquith buys Norfolk Lodge School Montessori group (March 2016)

Asquith buys Barley Barn (February 2016)

EXPERT VIEW: PAUL MILLER, CEO, REDWOODS DOWLING KERR

‘There’s certainly been more activity this year for us than last year. Last year we completed 58 deals – that’s transactions rather than the number of settings – and as we speak, we’ve already surpassed that number this year. We’re already into the late sixties and are forecasting a total of 90 childcare deals by the end of 2016.

‘As and when relevant opportunities become available, the bigger group players are buying up regional chains and selective one- or two-site settings that fit their specific criteria. Local regional players are looking at smaller groups, and indeed also single- and dual-site settings.

‘There is strong demand both from the corporates and the private equity and venture capitalists for quality childcare businesses. The sector is seen as a good long-term investment and I think there will always be demand in what is still a highly fragmented market. People and families need childcare and will continue to do so – working parents need that level of support and are looking for good-quality nurseries that can care for and help develop their children. Good-quality childcare settings are attractive to both investors and larger groups, so if operators can deliver that quality, the demand isn’t going to go away.

‘In certain key areas, I’d suggest demand exceeds supply. If you look at places like London, the South East and some of the major conurbations around the UK, occupancy levels are very high, as is demand from parents for childcare.

‘In terms of mergers, acquisitions and investments in the next 18 months, it will continue to be strong. I think there are opportunities out there for operators to grow at all levels and this year the vast majority of the deals we’ve done have been with either first-time buyers or regional groups. I see appetite at a corporate investor level, but also at a first-time-buyer level, and that feeds demand throughout the market. So ultimately, while there are good-quality settings and opportunities that come to the market, there will be activity in the marketplace.’