Unlike many other markets in the UK, which are already slowing significantly as a result of the economic squeeze, the nursery sector remains resilient. However, the business picture is becoming increasingly complex, and those looking to buy or sell will have to adapt to a changing landscape.
‘Overall, global and national mergers and acquisitions (M&A) activity is declining,’ says Arun Kanwar, partner at Cairneagle (pictured). ‘Partly, this is a reversion to normality after a very hot market last year. But the market is also more challenged, with interest rates going up and more economic uncertainty. However, in the nursery market, it’s remained incredibly buoyant.’ 
Kanwar estimates the nursery market overall this year will be worth around £6.3 billion, up from an estimate of £6 billion for 2021.
BOUNCE-BACK
At Christie & Co, brokers are seeing a strong bounce-back from the pandemic, with one of their most successful years to date.
Director and head of childcare brokerage Nick Brown (pictured) says, ‘This year so far has been a phenomenal year for sales. They are coming thick and fast, which is crazy really, off the back of a pandemic.
‘I think after Covid, people have reassessed what they’re doing. We’ve all seen stuff in the last few years that has brought our plans forward. Sales breed sales, and while I don’t know whether the market is at a peak, some of the prices that are being paid are considerable.’
Large groups still seem to be investing in the market, despite soaring inflation.
‘Sales are being driven by some of the larger operators still growing at a fast rate, who do not seem to be put off by the potential headwinds,’ Brown continues.
He says many operators are looking to buy small local groups, or a set of nurseries close to each other.
‘A lot of people are looking for clusters of five to eight nurseries. They don’t all have to be trading phenomenally, but the buyer wants to see a future.’
Indeed, Family First bought the ten-setting Davidson-Roberts group in July, while Bright Stars has bought Cheshire Day Nurseries. Grandir UK has purchased Rushcliffe Day Nurseries and Maggie & Rose, and The Old Station Nursery Group has acquired Good Manors Day Nurseries.
‘The larger groups are in a nice situation in that they can have the pick of the crop,’ adds Leah Turner, co-founder of specialist broker Owen Froebel (pictured). ‘They’re buying established groups rather than individual sites because the market hasn’t yet consolidated to a point where they’re having to downgrade what they’re looking at.’
NEW REGIONS
The market is changing, however, in the face of widespread financial gloom and some cautionary tales, such as Bright Horizons losing 37 per cent of its share price in the past three years.
‘I think this is a turning point,’ says Kanwar. ‘Lots of people are still buying, but there is a level of caution. So far there has been no slowdown, but horizons in the nursery space are changing.’
Where groups are buying individual settings, it is often as a step towards a new platform in a previously untapped region.
‘There’s been oversaturation of demand for acquisitions in the South-East, and London prices have gone through the roof,’ says Kanwar. ‘Businesses are asking where else they can buy settings at a sensible multiple.
‘Areas like the Midlands have historically not been that consolidated, so they are becoming new battlegrounds.’
Indeed, the Midcounties Co-operative has opened its second nursery in the area, in Warwick. Family First has purchased settings in Nottingham and Derby, and All About Children has bought a setting in Leicestershire. Hollies Day Nurseries has recently acquired its fifth site in the Midlands, while Kids Planet has also expanded its portfolio in the region.
Meanwhile, the weak pound looks set to continue to make UK assets attractive to international buyers. Utsaha Education purchased its first British nursery this summer, having previously invested in an overseas nursery business.
‘I think we should probably expect more international buyers who will try to get into the UK on a cheap pound,’ Kanwar says.
WHAT CAN GO WRONG
Experts warn against expanding too quickly, particularly in the wake of the pre-packaged administration sale in August of 26 settings owned by Welcome Nurseries, formerly the fourth-largest group in the country, which expanded rapidly during the pandemic, buying nursery businesses in deprived areas that could otherwise have faced closure.
‘If you think you can shortcut this market, good luck,’ says Brown. ‘If you get it wrong, you can do so spectacularly. Growing quickly without infrastructure will not work. If you’re buying something for very low cost, there’s a reason for it.’
Taylor agrees. ‘If you expand quickly, you could suddenly go from a small management team to not enough people to go around. It’s very tricky to go from being a small to a medium-sized business. You have to make sure you lay the groundwork.’
A rigorous approach to due diligence matters more than ever in the face of these recent events.
‘Preparation is key,’ says Brown. ‘That means making sure your numbers are up to speed and that you’ve got a good handle on day-to-day happenings. The people that are buying places at a premium are not just handing over cheques. There’s going to be quite an intense journey before you get your hands on the money.’
Kanwar agrees. ‘We’ve seen at least one house of cards come tumbling down this year, so buyers need to exercise caution to really understand the merits and risks of acquisitions. They also have to balance M&A with keeping their own house in order, and be mindful of their true exit multiple. I think we’re moving past the period where sellers can offer a nursery business on the market and at least one party will buy it without careful consideration.’
STORMS BREWING
Kanwar adds that in the face of rising interest rates, the cost of debt increases and valuations will start to go down, creating more of a buyer’s market.
‘It is still a hot market for operators looking to sell, but they should be starting to temper their expectations a little bit,’ he explains. ‘I think it’s a storm that’s coming. But prices won’t drop as dramatically as other sectors, because of the attractiveness of childcare, and at least a dozen consolidators already. The best assets will still command good prices.’
The cost-of-living crisis and energy bill rises will inevitably have an effect, however.
‘Of course we’ve seen some of the headwinds about utilities and cost prices,’ says Brown. ‘The cost of building has gone through the roof, which is a challenge for new sites. There is going to be some pain to come, and we would be foolish not to note that.’
Turner agrees. ‘The downturn could mean occupancy issues. The biggest problem is where margins are already tight. If smaller settings are not keeping an eye on delivery costs, income could be lost very quickly. It’s safe to say we can expect closures. But that’s more likely to be smaller rather than larger groups, which have economies of scale.’
Brown is confident there will be governmental support, however.
‘We don’t know what the future holds, but the Government is putting caps in place. Who would have predicted furlough? Children are still going to need to go to nursery, the market is still good, there will be some help and we’re still super-positive.’
Turner echoes these sentiments. ‘Banks are happy lending, even to individuals. With childcare classified as within the healthcare sector, lending is always greenlit at times of economic uncertainty.
‘It’s a weird thing to say, given the situation the country is in, but the market is very robust, and I don’t think we’re going to have many issues. There will be casualties, but overall, as an industry, we’re going to be OK.’
Case study: Storal Learning – ‘at a steady pace’
Storal Learning considers three options when looking to expand: acquisitions, adding to existing sites, and new nursery launches.
‘It gives us real options to have three different ways to grow,’ explains chief executive officer Sarah Mackenzie (pictured).
‘We’ve got confidence that we can keep growing, not at super speeds, but at a steady pace we feel comfortable with.’
The group, which currently owns 26 nurseries, has taken all three approaches in the past year.
It acquired Blueberry Nursery School in Brighton, Nappies and Paddies in Brentwood, and Farley Outdoor Nurseries’ three settings. It increased capacity at its setting in Ashby-de-la-Zouch, with the addition of a new pre-school building, and also launched two new nurseries, in Romford and Banbury. One was a renovation project while one was a completely new build.
‘The new-build was a significant moment for the group, because all of our growth to date has been through acquisition,’ says Mackenzie. ‘It’s been very exciting to have organic launches as well.’
When looking for a new setting, the group considers location above all.
‘We’re quite geographically spread, but we operate in regions,’ explains Mackenzie. ‘If we were creating a brand-new region, we’d look at a small group rather than individual settings in order to be more efficient.’
Knowing the location well gives the group confidence to choose a nursery with a good local reputation or introduce something new that the area lacks.
‘The local labour market is a consideration,’ says Mackenzie. ‘We think about what the area would be like for recruitment. Building size is also important, as some would be too small for us to make sustainable.’
The current economic climate, if anything, is pushing the group to expand more, Mackenzie says.
‘We haven’t seen an impact on demand. Both parents are increasingly having to work. But they do want value for money. We have to make sure that they feel they’re getting quality.’
As such, the group sees this as another key criterion when expanding.
‘We would never purchase a setting where there were significant issues with quality,’ says Mackenzie. ‘We’re happy to take on a nursery where we feel we can add value, but there has to be a good foundation. We don’t want to go into a nursery that’s failing.’
Case study: Tops Day Nurseries – making positive change
As a certified B-Corporation business, Tops Day Nurseries has a remit to meet standards of social and environmental performance. With this in mind, the group often actively seeks out struggling nurseries for acquisition.
‘We have done a few takeovers, and do target settings that need our help,’ says sales and marketing director Harriet Pacey (pictured). ‘We want to make a difference.’
Pacey acknowledges there is a business benefit to targeting struggling nurseries, too. ‘It’s obviously cheaper to buy things that are failing, but we have a strong set of values and always want to ensure we have social impact by going in and making positive change.’
In 2018, Tops took over six Noah’s Ark Childcare Centre nurseries in Plymouth, three of which had Ofsted results of Requires Improvement or Inadequate. The buyers retained the entire staff team, but wanted to get to the root of the issues.
‘Takeover can be daunting to existing staff members,’ says Pacey. ‘The main thing for us is to talk to people, understand their needs and nurture them. If there are any issues with quality from a staff perspective, we know we can help.’
The company quickly noted that a staff training plan was missing from the nurseries. ‘It was clear that a lack of investment in staff was the main reason the nurseries were struggling,’ says Pacey. ‘There wasn’t really training in place at all.’
Tops’ central training team ran training needs analysis to provide what was needed, and all six nurseries now have an Ofsted rating of Good.
Pacey says Tops would feel confident helping settings with similar issues, but would stop short where the group could not make any physical changes.
‘We would be put off if the building was a concern. Location is also a factor. But when it comes to quality, we know we can make an impact, and that will benefit everyone,’ she explains.
