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Sunday, October 24, 1999

Sun Healthcare's Troubles Stretch Into Britain

By Thomas J. Cole
Journal Investigative Reporter
LONDON -- These are financially tough times for the nursing-home industry in Britain -- just as they are in the United States.
And that spells double trouble for Sun Healthcare Group of Albuquerque, one of the largest nursing-home operators in both countries.
One of the biggest problems in Britain is that the current supply of nursing-home beds far exceeds demand.
"In general terms, the market is in a bad way," said William Laing of Laing & Buisson, a leading analyst of the British nursing-home industry.
Sun entered the British market in 1994 during a boom in the nursing-home industry and is the second-largest operator in the country.
Through its subsidiary Ashbourne, Sun Healthcare Group operated about 150 facilities with 8,370 beds in Britain as of June 30, according to the company.
Sun chairman and chief executive officer Andrew Turner said in 1997 that the company was making a "huge profit" in Britain in part because of generous government payments for nursing-home care.
But those payments aren't as generous today, and there are other problems for Sun and the industry.
Sun, in documents filed with the U.S. Securities and Exchange Commission, said it has been hurt in Britain by increased temporary-staffing costs due to a shortage of nurses and by increased rent expenses.
Other industry problems, according to Laing & Buisson, include introduction of a national minimum wage and a directive that entitles every worker to four weeks of paid leave each year.
"Is the government trying to bankrupt the U.K. care-home industry in the way the U.S. government is bankrupting its long-term care industry?" Richard Ellert, chief executive of Nursing Homes Properties, asked in a recent report by Laing & Buisson.
Sun and other U.S. nursing-home chains have reported billions of dollars in losses in recent months. Sun and another large company have filed for bankruptcy reorganization.
The chains have blamed the financial troubles on lower reimbursements from Medicare, the U.S. health-care program for the elderly and certain disabled.
Sun's overseas operations account for about 10 percent of the company's net revenues.
Most of Sun's overseas operations are in Britain, although it also has facilities in Spain, Germany and Australia.
Sun has reported that in the three months ended June 30, operating expenses for its overseas operations ate up 91 percent of revenues.
Sun has reported that it sold 11 facilities in Britain in July for $38.6 million, then leased back the properties for 12 years. The transaction, according to the company, resulted in a loss of $16.9 million.
Sun also recently posted a non-cash charge of $33.7 million to reflect that some British properties are now expected to earn less than initially thought.
"Certain of the U.K. facilities have not achieved profitability targets established upon their acquisition," Sun has told the Securities and Exchange Commission.
Sun declined a request for an interview on its British operations.
As in the United States, Sun has been in default on some lease agreements for nursing homes in Britain.
Sun's history in Britain is much like that of the company in the United States, building some homes but obtaining most of its properties through acquisitions of nursing-home companies.
Sun entered the British market in 1994 by buying a majority interest in Exceler Health Care Group, which operated 17 homes. Two years later, it added 33 facilities with the purchase of APTA Healthcare.
Sun acquired a 20-percent interest in Ashbourne in 1995 for $25.9 million, then another 9 percent in 1996 for $10.2 million.
In 1997, the company paid $110.1 million for the remainder of Ashbourne, which operated dozens of homes, and consolidated its properties under the company's banner.
Laing & Buisson expects the British care-home industry to eventually rebound.
"Despite the gloom, there are clear indications that the market is now in a process of readjustment, which could in due course lead to a recovery of financial health," Laing & Buisson said in a recent report.
"One of the keys to this process will be elimination of excess capacity ... This would in turn redress the power balance between purchasers and providers."
Laing & Buisson said the proposed new national standards for British nursing homes could reduce capacity by forcing the closings of homes that cannot comply with the standards because of costs or other reasons.
The founder of the British subsidiary of Sun Healthcare and two other company officers have resigned in the past year.
Thomas Hamilton founded Ashbourne in 1987 and had remained as its top manager after the company was acquired by Sun in 1997.
Hamilton said he resigned after being told he would no longer report directly to Andrew Turner, the founder, chairman and chief executive officer of Sun.
"I felt that Sun was going in a different direction to me," he told The (United Kingdom) Herald in an interview published in October 1998.
Hamilton couldn't be reached for additional comment.
Martin Feeney resigned as a director of Ashbourne in March after more than 10 years with the company, which is based in Scotland.
Feeney told the Journal he objected to the quality of the managers chosen by Sun to oversee the company's operations in Europe and Australia.
Sun also needed to continue to expand in western Europe but didn't have the money to do so, he said.
"The company was going nowhere fast," Feeney said. "What is the point of staying as a director of a company that isn't going anywhere?"
Ashbourne's current financial problems are a result of the company being top-heavy with managers, a reluctance to reduce costs and inexperienced management, Feeney said.
Colin Rhodes also resigned as a director of Ashbourne after about a decade with the company.
"If you have all the responsibility and none of the authority (to take action), it is not satisfactory," Rhodes said.