Brain implant bolsters Eldercare

Friday 1st February 2002

Eldercare's Alan Clarke goes about his business with a minimum amount of fuss. Two years ago he took the hot seat at a company that seemed headed for an early grave.

Despite its position in the fast-growing "aged care" sector it had clocked up three years of growing losses.

When Clarke took over, term debt was an unsustainable $50 million. Following yesterday's settlement of two acquisitions debt is now down to $32 million and shareholders' funds $45 million. Clarke says cashflows now comfortably cover interest costs.

On that basis alone the share price might be expected to have rebounded much higher than the 22-25c range in which it now sits. And the successful refinancing isn't the the only good news the company can offer.

But, as Clarke acknowledged at last October's annual meeting, it will take a while before the market forgets Eldercare's dubious history.

Back in 1998 the listed vehicle was New Zealand Petroleum, a company that had given up looking for oil four years previously.

Eric Watson's Malibu Equities emerged as the major shareholder and secured the other shareholders' approval to back in Blue Cross Eldercare, a retirement village owner and operator.

The company embarked on a series of acquisitions and developments, boosting debt levels. By the time Clarke turned up the much-hyped elderly accommodation market had became overstocked and operators were struggling to make a buck.

Clarke and the board set about simultaneously diversifying into the broader medical services sector and shoring up Eldercare's finances.

First, they decided to quit being a property owner and manager. Property and investment sales (such as an ill-fitting stake in receivables management company RMG) to date have raised $11.3 million. A further $5-6 million of land assets are either under negotiation or subject to sale and purchase agreements.

The proceeds formed part of a refinancing that included a one-for-7.5 rights issue which raised $3.5 million.

Fund manager Alliance Capital took an 8.3% stake by taking a $2 million placement at 16.5c a share and Watson's Cullen Investments paid $5 million for a convertible notes issue that will lift its stake to 57% on a fully diluted basis.

At the same time the company went buying.

In June 2000 it bought Ranworth Healthcare, a provider of rehabilitation services for people with brain injuries.

Ranworth last year ran into problems which, while they sound fixable, put a question mark over the quality of Eldercare's due diligence.

Its pre-tax earnings contribution in the November first half was down 25% on the previous year's $1.2 million. The drop, the company explains, is due partly to a higher-than-expected rise in the associated head office costs.

Ranworth's primary funder, ACC, has also been switching contracts from a fee-for-service to a bulk-funded basis, causing what Eldercare says is a one-off timing-related earnings glitch.

The deals settled yesterday were two private pathology concerns, Medical Laboratory Wellington (MLW) and its subsidiary Nelson Diagnostic Laboratories.

Eldercare says they will boost revenue by 48%, from $33million to $50 million, and contribute about $2.3 million a year in pre-tax earnings without adding anything to overhead costs, with the full impact, along with the benefits of the refinancing, coming through in the May 2003 year.

As important as the new financial structure and direction are the beefing-up of Eldercare's board and senior management.

Clarke joined the company from SGS, an Australian operator of pathology and radiology labs.

He knows the New Zealand market well, having bought for SGS about half our privately owned pathology labs before selling them to another Australian outfit, Sonic Healthcare.

Heading up finance is Brian Monk, a former chief financial officer of Fletcher Energy and finance director of Air New Zealand.

At the annual meeting Jim Syme, the deputy chairman of ASB Bank and a director of Waste Management and Software of Excellence, took over as chairman. Clinton Teague, a director of MLW, will join shortly and the company is looking to appoint a third independent.

Cullen Investments' nominees are chief executive Phil Newland and finance director Maurice Kidd.

Clarke is now planning more acquisitions in the medical services area to further reduce the concentration on retirement villages.

The Eldercare story provides good anecdotal ammunition for those inclined to speculate Watson's business empire is struggling for cash.

Backing Blue Cross Eldercare into a listed shell has allowed Cullen to raise $8.5 million through the rights issue and Alliance, and to pay for acquisitions with Eldercare shares.

The fact Cullen contributed by taking interest-bearing notes rather than equity on which no dividends are in immediate prospect points in the same direction.

Using Eldercare funds to support Cullen's RMG roll-up won't have endeared Watson to minority shareholders either.

Eldercare booked a $1.3 million loss on the stake's sale.

Still, credit where it's due. Under Cullen's direction the company now has a sound base, a strong management team and board, and plenty of blue sky ahead if it handles its expansion right.

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