Nursery Chains: Business - Keeping a cool head

The country's financial turmoil is bearing down on the early years sector, but many of the larger corporate providers and chains are weathering the storm surprisingly well.

Ian Murchie, relationship director in the Healthcare Team at Barclays Corporate, says, 'Many of the larger providers or chains seem to be performing well despite the current economic challenges. Many are reporting like-for-like performances on a par with the previous year or, indeed, improving performance. It seems to come down to quality.

'Those which have got a really good reputation are doing well and if their settings are located in the right areas, they might not even have been affected by the economic climate.'

He adds, 'There are areas around the country which have been more affected - where, perhaps a major employer has relocated - but there are also quite a few areas where job levels have held up relatively well. If providers have settings in these areas with good transport links and parents tend to be double earners, then they are reporting pretty robust demand.'

Property price drop

Cheryl Hadland, managing director of Tops Day Nurseries, says, 'Last year was a record year for Tops nurseries. The first six months of this year were really good, but August was not good and September was bad. There always is a drop in September, but this year it is a little bit more than last year.'

Ms Hadland reports that the chain's occupancy rate has held up, but the group has been working hard on its marketing.

'We have seen changes in patterns of use,' she says. 'Families are definitely turning more to grandparents for informal care. It is really hard to make money out of day nurseries.'

Ms Hadland's biggest concern is whether the NHS is going to make big staffing cuts. 'Five of my nurseries are on NHS sites and they have seen job cuts, but it is OK for us while they are not cutting frontline staff.'

The past year has been unsettled at Happy Child, according to managing director Tracey Storey, as parents who run their own businesses have been finding times hard.

'We have seen decreases in sessions in some cases where people are cutting back. Other parents have increased their take-up as mothers are returning to work earlier from maternity leave or are taking on extra hours because their partner has been made redundant.'

The latest figures published by Ofsted show that while more nurseries shut than opened in the quarter to June, with 672 closing against 593 newcomers, the number of daycare places rose by 955. Analysts say this suggests that existing nurseries are increasing their registrations.

The silver lining in the economic cloud for people looking to buy early years settings is that nursery owners are recognising commercial realities, and prices have fallen.

Courteney Donaldson, director of Christie + Co and head of childcare, says, 'Last year owners looking to sell still had quite high aspirations and had not picked up on the downturn in property values. There has been a sea change this year.

'The economic downturn is touching everybody: the cost of living is rising, unemployment is at record levels and prices are falling. There has been a realignment in prices because of the economic conditions.

'People now realise it will be maybe two or three years before we weather the storm. We are aware that there are Government and local authority cuts that have not really hit us yet.'

However, it is not easy to find the right property to add to the portfolio, Ms Storey says. 'We are actively looking at acquisitions but haven't added any yet.'

Investors and buyers

According to Tom Phillips, investment manager at Downing LLP, investors are interested in the expansion plans of key nursery chains.

'From our point of view, the people we are speaking to can see good opportunities and are very positive. For example, we invested in Gingerbread Pre-School and Day Nursery Group this summer.

'However, I think everybody is being really considered at the moment and they are not rushing into anything. They are prepared to be bold if the right opportunity comes up.'

One of the key aspects LLP looks for is a strong management team with experience in the sector.

'Given the current economic climate, we also like to see management teams that have experience of trading through the bad times as well as the good,' says Mr Phillips.

'We are looking at supporting businesses with three to ten sites who wish to grow their groups. The nursery managers in the settings are key, and above all, the setting itself has to be in the right location.'

Barclays' Ian Murchie says, 'The sense I get is that people are looking to buy the "good quality" settings, as opposed to the more "distressed" options.

'Buyers have become quite choosy; it is about taking advantage of the right opportunity.'

At Tops Day Nurseries, Cheryl Hadland reports that the group has two nursery launches coming next year. 'We had one planned for this year but it fell through just three days before completion. One nursery will be leasehold and the other is being acquired with an investor.

'We won't borrow from the banks at the moment because they would want to renegotiate our existing loans. We have got quite good deals, so that would be a disaster for us.

'I am also worried about how our property values have held up. I am not sure whether we would be able to raise enough, so there is no point us approaching the bank. We are going in with a property developer who is creating an industrial estate. The other nursery we are financing with our pension plans - that is a conversion.'

Chains including Co-operative Childcare and Busy Bees have made the headlines with acquisitions this year. Ms Donaldson says, 'There are a number of things that are progressing through the deal pipelines which hopefully will be completed by the end of the year. We expect more transactions to go through of both good-quality assets and those that are being sold under an element of distress.

'Christie's runs a banking support and recovery service to assist banks with customers who are in difficulty, which works with other sectors and not just nurseries. We have seen a small number of nurseries in difficulties compared with areas such as public health, hotels and restaurants. On the whole nurseries are doing well, although there are variations.'

BERTRAM GROUP: GOOD CLIMATE FOR CONVERSIONS

The Bertram Nursery Group, which was launched in 2006, has just added two of its planned four new settings this year, bringing the total to 33. The company operates across Scotland and around Manchester and Liverpool.

Susan McGhee, commercial director, says, 'We have just opened a 100-place nursery at Princess Dock in Liverpool, which has room to expand, and also opened at MediaCity UK in Salford. Also this year we are adding a second unit to our nursery at Hope Hospital, Salford, which will double it in size. In central Scotland we are taking on the leasehold of a Victorian villa which is being converted into a nursery.

'Last year we decided we would move from acquisitions, which is the way we have grown so far. We are now in a position to start nurseries ourselves and give them time to grow. We built into this year's business plan to open about four new nurseries a year over the next three years.

'Acquisitions do generate income immediately, but they can take up management time with the transfer of ownership. We are siting new nurseries within the clusters we already operate, which is easier as we have local contacts. In some cases we are already registered with local authorities and have existing staff teams working at other settings within the cluster whom we can promote to the new settings.

'Where a nursery is well known locally with a good reputation, we have kept the name of the nursery. We like the idea of the local nursery but we never hide the fact we are part of a bigger group.

'This is a good time for undertaking conversions - rents are lower and property developers are looking for alternative things to do.'