Decision on Transform’s future ‘imminent’

UNCERTAINTY surrounds the future of plastic surgery company Transform Medical Group, despite it making a £4.8m profit last year.

But the company’s chief executive has revealed to TheBusinessDesk that a decision from the bank on the sale of its debt-laden parent company is “imminent”.

Transform, based in Wythenshawe, is part of the Covenant Healthcare Group, which also includes Abbey Hospitals, a four-strong private hospital chain, and Churchills Clinics, which operates psychiatric hospitals and the Liverpool Obesity Centre.

Mid-market private equity firm Cognetas bought the businesses from Phoenix Equity Partners in 2005 for £170m, with around £90m of the funding from HBOS, now part of the Lloyds Banking Group.

Although all three of the businesses are profitable, Covenant cannot sustain the huge debt that has been heaped on it following the sale. It breached banking covenants on its loan more than 18 months ago, giving Transform an uncertain future.

Chief executive Nigel Robertson said: “The business was massively over mortgaged as a result of that. It’s too big a mortgage when the group is worth around £50m.”

But all three of Covenant Healthcare’s businesses are profitable. Transform made a pre-tax profit of £4.8m in 2008, according to latest accounts to the end of September. However, this was still a 32% fall on the £7.1m it made in 2007.

Turnover stood at £41.4m, slightly down on the £41.2m it made a year earlier. It employs around 300 staff with a wages bill of £9m.

Mr Robertson said: “While the overall business is over mortgaged and has legacy issues, if you exclude the debt, all three businesses within the group are profitable. Transform proved remarkably resilient in these testing times.”

He added that although 2009 turnover would be less than last year, it is ahead of the current forecast. Transform plans to continue to develop new operating units in healthcare where it sees sufficient, sustainable demand and a new hospital is due to open in London at the end of July.

But Mr Robertson is in no doubt that uncertainty over the future ownership of the group has impacted on the performance of its businesses.

“That’s held the business back in terms of future investment. We should be opening more clinics but this has had to be delayed and is detrimental to the business,” he said.

Covenant Healthcare is up for sale, and several expressions of interest have been made, although the bank is understood to only be in serious negotiations with a consortium headed by Covenant’s former chief executive Magdy Ishak.

Alternatively, HBOS could seize control of Covenant, back its management team and restructure debt for equity. Mr Robertson said a decision was expected “imminently”.

“The bank is still talking to this consortium, and of course that’s between them, but the bank set various very short time frames to put together a deal and has not wanted a wider sale process.

 “Our funding future is in the hands of Lloyds at the moment. It’s gone on for so long I couldn’t forecast what they are planning to do.”

In December 2008 Bank of Scotland bought out syndicate lenders Landsbanki and Alliance & Leicester to become the group’s sole lender. It also made a further facility of £5m available to “support the groups ongoing trading and avoid insolvency”.

Group borrowings with the Bank of Scotland currently stand at around £90m, compared with £104.7m in 2007. It accrued interest of £12.9m on its bank loans over the year and £11m on dividends on preference shares classed as debt, but agreed an interest holiday at the end of last year while the finances are resolved.

Directors of Covenant Healthcare said liquidity risk was a “vital area of management” for the company.

They even gave a note of thanks to the bank in its accounts, for continued support in making new facilities available and agreeing to waive existing covenant requirements and interest payments while a new long term investor is identified.

Covenant’s latest accounts for the same period show its turnover stood at £68.7m (2007: £73.3m) with a pre-tax loss of £7.9m (2007: £137.7m). The group said turnover had declined due to the closure of Caldew Hospital in Carlisle and Churchill Gisburn Hospital in Lancashire during the financial year.