The Theory
Although each transaction we have completed to date has been different, they all share a number of common features.
In each case, there has been the same process to go through, as follows:
- Discussion of the potential shape for a transaction, leading to an offer in principle to purchase and leaseback a setting or settings. This offer generally takes the form of a “Heads of Terms”, setting out the key characteristics of the transaction. This is signed by both parties
- Next we undertake the necessary due diligence. This always includes a visit to the setting from a member of the Nexus PINE team, as well as visits from a valuer and a structural surveyor. Often, we also ask our accountants to conduct a financial review of your nursery business. We also have a desktop environmental survey of the property carried out, to confirm that the site is not at risk of being contaminated. The due diligence has so far taken between three and six weeks, depending upon the complexity of the transaction
- At the same time as the property due diligence is being carried out, our lawyers will be busy on two fronts. They will negotiate the lease and the sale agreement with your lawyers. And they will carry out legal due diligence, to confirm that the title to the property is in good order. This involves carrying out local searches to make sure there are no plans to build a highway through the middle of the site for example. It also involves making sure that there are no restrictive covenants affecting the site, ensuring that access to public highways from the site is clear and unimpeded, and that the relevant planning applications have been obtained and complied with. The process of getting the legal due diligence completed, and the sale and lease agreements into agreed form, has taken between three and eight weeks
- Once all of the due diligence is complete, and the final wording of the lease and sale agreements has been agreed, then we are ready to pay the consideration for the building and complete the transaction. This part of the transaction takes around a week from the completion of due diligence.
The Practice
Set out below are a couple of examples of how it has worked in practice:
1. Nord Anglia portfolio purchased by PINE for £12.5m net consideration in June 2006
We were approached by Nord Anglia in early June 2006. They wished to complete a sale & leaseback of seven of their Leapfrog settings. All of the settings in the sale & leaseback portfolio were large purpose-built, with each one registered for more than 100 children. The portfolio was geographically diverse, including settings in Southampton, Bristol and York, as well as Bicester, Thurrock, and two on the outskirts of London. Nord Anglia’s reason for wanting to do a sale & leaseback, we understand, was in order to raise capital to invest in other fast-growing parts of their business.
Within five days, we had signed Heads of Terms with Nord Anglia, which set out the basic framework for the transaction, including the amount we would pay for the seven settings - £12.5m. During the period we had been discussing the Heads of Terms, we alerted our professional advisers to the potential transaction. This meant that once Heads were signed, we were able to arrange valuations and structural surveys of all seven settings within a very short timescale. Members of the Nexus PINE team also visited each setting the following week.
Fortunately, Nord Anglia already had available a large amount of the information we required in order to conduct our legal due diligence, which meant that the transaction was not delayed while we waited for Local Authorities to reply to requests for information and so on. This probably shortened the acquisition timetable by a couple of weeks.
The wording of the sale and lease agreements was finalised by means of numerous telephone conversations between us and the Commercial and Property Directors at Nord Anglia, with both parties acting with a lot of input from the respective lawyers.
With everyone working flat out, and with good communication between the vendors and Nexus PINE, we were ready to exchange contracts in a little over three weeks from start to finish. Because of Nord Anglia’s status as a quoted company, they wanted very much to announce the transaction to their shareholders before their Chief Executive flew to the Far East to review part of their overseas operations. The afternoon before he was due to fly, the contracts were signed for Nord Anglia by one of their Directors who was in London that day. Everyone breathed a sigh of relief, until we realised that the contracts could not be exchanged until the papers were held by each party’s lawyers, and Nord Anglia’s lawyers on the transaction were based in Leeds. So there followed a three hour dash by motorcycle from London to Leeds before contracts were finally exchanged at 10pm that night – in time for the Nord Anglia CEO to make his announcement and then jump on the plane to Beijing.
2. Acorns Children’s Centre, Bolton, purchased by PINE for £700,000 net consideration in February 2006
Acorns Children’s Centre is a stand-alone setting for 78 children within a stones throw of the Reebok Stadium in Bolton. The nursery is in what was once a British Aerospace sports club, which has been sympathetically and effectively converted for day nursery use. The most striking feature of the setting is that the nursery occupies the rooms all around the edges of the central sports hall of what used to be the sports club. This is the size of a couple of tennis courts. So when it is wet outside, the nursery children simply make use of the largest indoor play area I have ever seen!
This transaction was made more complicated by the fact that our process of legal due diligence raised a number of issues around the title to the premises. There were question marks over the exact boundaries of the site, over a potential ransom strip between the public highway and the car park used by the nursery, over rights of repair to the drains from the setting, and over the nature of the rights enjoyed by the setting over their car park. All of these issues took time to resolve, but happily, with goodwill on both sides, and some intelligent and creative thinking from the lawyers, solutions to all of these problems were found.
Because of the problems with the title, this transaction took longer to complete – around four months in total. But at the end of the day, PINE was able to purchase the nursery premises for the amount of consideration, and on the terms, set out in the original Heads of Terms
3. Busy Bees Day Nursery, Bishop’s Stortford, purchased by PINE for £1.05m net consideration in December 2005
The Busy Bees Day Nursery is a recently purpose-built two storey setting for 55 children in a development including a Sainsbury’s supermarket, a pharmacy, and other shops on the outskirts of Bishop’s Stortford. The business was acquired by Busy Bees some five years ago, and the nursery is well run, and full to capacity.
This setting was purchased from Busy Bees along with another of their settings, in Welwyn, and was the first transaction completed by PINE. As a result, we were on a steep learning curve during the transaction. Happily, the experience we gained during this transaction has served us well on the transactions that have come after it. The speed and smoothness of the transaction process has undoubtedly improved with each transaction completed.
The Lessons Learned
Over the period since May 2005 when PINE was launched, we have learned a great deal. We have met with the owners of literally hundreds of day nurseries, and have reviewed the options for concluding sale & leaseback transactions with the great majority of the top 20 operators, as well as dozens of operators running smaller groups and stand-alone nurseries. I can summarise the lessons learned from this experience as follows:
- A sale & leaseback transaction is a relatively straight-forward transaction to complete. Each transaction has brought its own challenges, but in every case so far we have been able to overcome those challenges, and complete the transaction on the basis of the terms originally agreed at the outset
- In this respect, a sale & leaseback is very different from a business sale, where the outcome of the transaction is often in doubt right up until the ink is dry on the sale agreement
- Because sale & leaseback transactions with day nursery operators is all we do, we now know the sector very well. If a setting meets our investment criteria (see the section on the website for more details), and we make an offer of terms for a sale & leaseback transaction, you can have great confidence that the transaction will go through
- Dialogue between you, as the vendor, and ourselves, throughout the transaction process, is central to ensuring the process runs smoothly. I have the greatest admiration for our lawyers, and am very often impressed by the dedication and speed of response of vendors solicitors. But in the end, they cannot complete the transaction on their own. They need the input of the principals to the transaction
- There are a huge range of different types of nursery setting. Provided a setting meets our four investment criteria, we have a completely open mind about the types of setting we invest in. Among the settings already purchased by PINE, there are gleaming modern purpose-built units, and converted three hundred year old stone-clad cottages; there are settings registered for 50 children, and settings registered for 150 children; and there are settings built in urban centres, and settings tucked down quiet country lanes far from city lights. All, in their own way, are providing excellent care and education to the children that use them, and are meeting the needs of the parents that choose those settings to look after their children
