Nursery Chains: State of the market - At the ready

With banks warning of stricter credit controls, mortgages becoming harder to obtain and the economy shrouded in gloom, it is perhaps surprising to find parts of the private day nursery sector bucking the trend and displaying some optimism.

The evidence comes from reports of rising occupancy levels and the declared aim of three chains in particular - KidsUnlimited, the Bertram Group and Just Learning - to expand their businesses.

Courteney Donaldson, director and head of Child Centric Sectors at Christie and Co has acted, in various professional capacities, for all three chains. She says that childcare is 'needs driven' and less susceptible to reductions in consumer spending than other sectors, such as retail or the licensed and leisure industries.

Through the company's recent contacts with nursery owners, it has emerged that occupancy enquiries have been 'at an all-time high during the first half of this year'. She explains, 'There appear to be two key occupancy drivers. First, existing parents are increasing their sessions; for example, from two days of childcare to three days, and second, some mothers who had planned to stay at home are returning to the workplace. So in some ways, the economic climate is potentially improving nursery operational performance.

'Only recently have I started to hear stories of some nurseries that are losing occupancy because of parents being made redundant. However, those places are being refilled by mothers returning to work.' Even when parents are affected by redundancy, if financially feasible they will often seek to retain a nursery place, because they need childcare both while they are looking for work and when they find a job.

Philip Blackburn, an economist at Laing and Buisson, points out that it is hard to predict what impact the credit crunch will have, 'as we haven't had an equivalent economic cycle as the last recession, and it was the late 1980s and early 1990s before there was a substantial growth in childcare'.

However, Lee Pearson, chief executive of KidsUnlimited, believes the key reason why his occupancy levels are rising is because the chain's nurseries are located in areas of 'high affluence', where parents are less affected by fee changes. One third of KidsUnlimited's fee income comes from its 15 workplace nurseries, and he adds, 'economic cycles tend not to have an impact, because they're normally done through salary sacrifice by employees with some sort of subsidy from companies.'

Demographic effect

Managing director of Just Learning Jonathan Bell says that the chain has experienced increasing occupancy in its nurseries which are distributed throughout the UK. However, he acknowledges that there have been 'some pockets where that has not been the case', mainly in parts of the north and East Anglia where the creation of government-backed children's centres has had an impact.

His optimism that demand for childcare will 'stay strong' has been boosted by press reports that Mothercare has recently posted strong figures because of a rise in the birthrate.

For Graeme Scott, chief executive of the Bertram Group, the immediate future of the day nursery market depends on the depth of the economic downturn. He says, 'If it is very deep, I can't imagine any business that won't be affected. But if the banks start to let money flow again towards October or November, hopefully things will improve.'

He shares the view that parents are aiming for more sessions so that they can work more hours.

All three nursery chains have the finances in place to proceed with their expansion plans. Courteney Donaldson says that deals are becoming more challenging, but she adds, 'While some banks are being cautious, as has been shown by the changing lending criteria, a number of banks view the sector very favourably and continue to be active. This ongoing interest bodes well for nursery operators, with a proven track record and a sound business plan.

'Many nursery groups, both national and regional, have acquisition funds approved and in place; they have a hunger for quality acquisitions. That's not necessarily a reflection of changes in the marketplace, it's more a reflection of this sector being ready for consolidation. We have seen some consolidation during recent years, but not significant levels. There are lots of opportunities out there for nursery chains of all sizes.'

Just Learning

Jonathan Bell says Just Learning had a choice of banks wanting to refinance and help expand the business, adding, 'So we haven't felt the impact of the credit crunch. Raising or refinancing debt for small to medium operators is expected to become more difficult, as lenders focus on larger, high-quality operators with a diverse portfolio and strong profitability record.'

Since the major nursery groups still have a very small share of the total market, he says further consolidation is likely and Just Learning will aim to be 'one of the consolidators'.

He adds, 'We now have £10m of fully committed financing from our banks to spend on acquisitions and new builds. Our majority shareholder, Alchemy Partners, remains positive about opportunities in the sector and is ready to invest additional equity to fund larger acquisitions or multiple new builds as and when needed above the committed £10m.'

He thinks it unlikely there will be further ABC-style take-overs of major chains, and reckons consolidation of the general market is 'some way off'. But he does see opportunities to buy up small to medium-sized groups, and believes that recent house price falls may be reflected in commercial property, making it 'a good time to buy'.

Bell says the chain's aim is to 'acquire one or more of the small to medium-sized groups, as well as acquiring appropriate single sites', and that it is in 'confidential discussions with a number of operators and other intermediaries'.

Much would depend on location and the type of property. While the company does have leaseholds and conversions, most of its business, around 80 per cent, is freehold and purpose-built. Another factor is the need for facilities of a certain scale. He explains, 'Our normal purpose-built nursery would give between 85 and 120 childcare places. If it is not purpose-built, they're usually smaller.'

A minimum of 45 places is usually required to make a nursery sustainable. He adds, 'However, we do have a wonderful nursery in Maidstone that has only 30 full-time equivalent places and it does terribly well for us.'

Philip Blackburn believes that buying an established nursery, rather than setting up a new one, would appear to be the most viable route.

He says, 'If expansion is mainly through acquisitions, there probably isn't a better time to buy nurseries. You can get them at an attractive price. And looking at long-term trends, nurseries are probably undervalued as an investment. If you are a well-funded nursery group without a lot of acquired debt, you can do well.'

KidsUnlimited

Lee Pearson says that KidsUnlimited refinanced at the time of the management buy-out earlier this year and secured significant backing from Lloyds Development Capital for its expansion. But he says, 'If we went to market now, it would be tougher.'

A couple of projects that KidsUnlimited had on the go have proved harder work in terms of obtaining the necessary planning permission. But he says that when the management buy-out took place, the pipeline of new nurseries for 2008-09 was already being developed.

Pearson says the chain's bullishness about its commercial future is reflected in the fact that it has advertised in the property magazine Estates Gazette in its quest for suitable sites for 2010 and beyond. It has also hired an agent to look for potential sites in London.

He explained that KidsUnlimited would continue its practice of creating purpose-built nurseries, rather than expanding through acquisitions or conversions. In fact, during the six years in which it was backed by Isis equity partners, it acquired just three nurseries from other providers. Pearson's rationale for continuing this approach is straightforward: 'We can't find anything as good as what we do.'

The company clusters its nurseries in geographic areas, currently the south-east, south Manchester, Oxford and Cambridge. He says, 'We would only expand into a new area if we could get a foothold. One of the benefits of the cluster-based model is that we can easily transfer resources. It gives us flexibility, staff better chances for promotion and it helps to develop the strength of management.'

Most of KidsUnlimited's six to nine new nurseries a year will be weighted towards the south-east, because most of the major residential developments will be there and the company is keen to work with housing developers.

The Bertram Group

The Bertram Group, founded in 2002 with one nursery, is a fairly new entrant to the daycare market. It had only three sites before it took over the Happitots nursery chain in Scotland in 2007 and then Manchester-based Holyrood group earlier this year.

Unlike Just Learning and KidsUnlimited, it isn't backed by private equity, but earlier this year it announced it had £20m to spend on acquisitions. Graeme Scott says, 'We are very good at identifying operations that have not done as well as they might and where investment would help.'

Since the chain has grown to 28 nurseries, it has invested in staff, IT, marketing and buildings. 'One or two of the acquired nurseries had buildings that were in a bad state,' he says.

With £15m left for further acquisitions, the company is planning to buy a group of three in Scotland, some 'one-offs' and further groups of four and seven in the immediate future.

Mr Scott, whose other commercial interests include a document processing business and a marina in the Virgin Islands, believes strongly that staff should be motivated not by profit, but be rewarded on the basis of quality, occupancy and meeting standards.

The company employs its own 'inspector', who makes spot checks on its nurseries, and Mr Scott finds that nursery managers are arguing for more qualified staff to ensure that standards are kept high.

He does not share the view that newly-acquired nurseries need to be 'integrated' into a chain. 'Nurseries have their own personality, they are there to serve the local community,' he says.

Future prospects

Not all nursery providers are in the same position as these three chains, or share their optimism. The economic woes experienced by ABC Learning, the world's largest childcare business, and the current problems facing Dawnay Day, which owns the Asquith chain, are stark reminders of the economic climate. But Philip Blackburn says that after some difficult years for the sector, 'the business fundamentals suggest that prospects are improving'.

It is clear, though, that armed with considerable funds, KidsUnlimited, Just Learning and the Bertram Group are likely to be in the forefront of any significant expansion or acquisition activity in the day nursery market.

FACT FILE

KidsUnlimited - founded 25 years ago by Stewart and Jean Pickering, the chain has a total of 51 nurseries, providing 4,758 childcare places.

Isis Equity Partners became a majority shareholder in 2001 until the management buy-out earlier this year, which meant the senior management team took a controlling stake.

At the time of the buy-out, Lloyds TSB Development Capital (LDC) became a 'significant minority shareholder' in the chain after investing an undisclosed sum.

The company also runs a voucher business with 400 employers involved issuing 6,000 vouchers a week.

Just Learning - opened its first nursery in 1996 and now operates 66 nurseries in England, Scotland and Wales with 6,117 places. Alchemy Partners became the majority shareholder in 2001, though management retains a significant stake.

The chain acquired Careshare, the largest Scottish operator, in 2003. Jonathan Bell succeeded Michael Fallon as managing director in 2006. Earlier this year, investment bank Ares Capital Europe agreed to take on the nursery chain's debt and lend it £10m to fund expansion.

Bertram Group - Graeme Scott started his nursery business in 2002, by buying a former care home in Edinburgh and converting it into a 100-place nursery. He then bought a second setting in the village of Banchory in Aberdeenshire and added a third nursery in Glasgow in 2006. In 2007, he bought the 12-strong Happitots chain and its 865 childcare places. Earlier this year, the group took over the nine-strong Manchester-based Holyrood Group. It now has 28 nurseries, providing 2,085 places, and plans to more than double its size in the next few years.

In 2004 the company set up its own in-house training agency.