Early into 2023, we are seeing some early years consolidators firmly taking a more considered and selective overall approach to M&A (mergers and acquisitions) than in the past. While pricing this year should inevitably cool somewhat against the previous two years, there is an element to which the market is beginning to bifurcate – ‘more attractive’ businesses which are still commanding high interest and valuations, and nurseries/groups which are more challenged and getting lower ‘distress’ pricing. The latter group also often have structural issues which make them less ‘attractive’ to buy for the main consolidators.
It's not quite as simple as that, however. On the one hand, there is at least one ‘blockbuster’ sale/ investment process expected in Europe in the first half of this year, which could significantly buoy interest/activity and pricing across the whole sector – what's often described as a ‘halo effect’. On the other hand, the challenge and uncertainty across the sector on staffing, cost inflation and elasticity of demand in the context of the current economic environment and price, increases needs to continue to be factored in by buyers. None of these are issues which will resolve easily or quickly.
Outside of M&A, there are a few interesting observations. First, many operators have begun to communicate their price increases for this year – in many cases they have been 10 per cent and above, and parent reaction has varied on a nursery-by-nursery level. Second, we are starting to see more and more independent schools understand the importance of developing their nursery offering to better meet the needs of working parents and not just as a half-hearted adjunct or feeder to their primary offering. Thirdly, the Government is under increasing pressure to do something to ensure childcare remains available and affordable to parents and that the supply side of the market remains sustainable.
We are still quite early in the year, so will need to wait to see how the market unfolds and the impact on deal activity.