Australia's booming aged-care sector set for unprecedented shakeup

By Byron Kaye

SYDNEY, Sept 17 (Reuters) - Australian aged care is about to become big business as investors rush for a slice of a rapidly growing $10 billion industry, seeking funding to buy rivals and build nursing homes in one of the fastest-aging societies in the Asia-Pacific.

In less than a year Australia will likely have its first three listings of aged-care operators - worth some $3 billion between them - as private equity owners take advantage of a roaring IPO market and investor appetite for steady returns from a sector supported by reliable government rebates.

The biggest of the listed firms will be industry No. 3 Regis Aged Care Pty Ltd, for which investment bank Macquarie Group Ltd will lodge a prospectus on Thursday to raise A$410 million ($369.08 million) for 40 percent of the company, valuing it at about A$1 billion.

Macquarie has grown Regis (NYSE: RGS - news) from 3,600 beds to nearly 5,000 since it formed the business from several aged care operators in 2007, and says that is just the beginning. The bank believes the company can double its bed count over the next five years as the industry consolidates and baby boomers enter the twilight of their lives.

Even (Taiwan OTC: 6436.TWO - news) so, Regis would still only command a small fraction of a market that is projected to lift revenue from A$10.7 billion this year to A$13.9 billion by 2020, according to data from industry researcher IBISWorld.

By 2050, the Australian government says the number of people aged over 65 will grow from 13 percent of the population to a quarter. Over the same time, it expects to increase total health spending from a quarter of the national budget to half. Government spending on aged care in the form of accommodation and other supplements is projected to reach A$66 billion annually by mid-century, from A$9 billion now.

To take the pressure off taxpayers, Canberra is also making it easier for Australians to pay "aged-care bonds", where they sell the house and give part of the proceeds to their aged-care provider, which then returns the remainder to their estate when they die.

"Even without doing your homework on a particular acquisition it looks pretty enticing," said Adjunct Professor John G. Kelly, chief executive officer of Aged and Community Services Australia, which represents 900 church and charity-based operators.

"You've got a regular government contribution to the sector, you've got an increasing demographic and they've either got to get community care or residential care, one way or the other. There's cashflow certainty."

After dramatic consolidations in other health sectors like non-government hospitals, radiology and pathology in recent years, aged care is now poised for a similar shakeup. Big backers like Macquarie, which has been quietly buying up nursing homes for a decade, are hoping to capitalise on the hottest Australian IPO market since the late 1990s to fund expansion.

Industry leaders said more than a quarter of Australia's 1,200 aged-care operators would be swallowed up in three years, with about 10 corporate players poised to control half the market.

As it stands now, the biggest operator, unlisted British United Provident Association Ltd, has just 3 percent share. Regis has 2.5 percent. Other major players include the first operator to list, Macquarie's Japara Healthcare Ltd , and Quadrant (BSE: QUADRANT.BO - news) 's soon-to-list Estia Health.

AT WHAT COST?

The shakeup comes just as the government and information-rich consumers demand higher standards from aged-care operators, playing into the hands of larger operators with economies of scale.

Major players also stand a better chance of winning sought-after "bed licences" - the system of government-regulated quotas of beds permitted in certain geographic areas, designed to ensure the subsidies are divided up equitably.

"Given the competitiveness and the pressures for quality and cost, there can be some substantial advantages of scale," said Hal Kendig, a professor of ageing and public policy at Australian National University.

While the industry receives most of its revenue from government, a push to get wealthier aged-care residents paying more of their bill may make it harder for nursing homes with poorer or fewer residents to survive.

"The risk could be that the best providers feel that they can't stay in the industry and provide the quality they wish at the levels of funding being offered," Kendig added.

For players like Regis, which will likely enjoy strong financial backing, the concern is less that they will struggle for revenue and more that they will face the sometimes competing pressures of expensive medical care and cost-conscious shareholders.

Nursing homes answerable to shareholders may concentrate more on presentation than unprofitable types of medical care, Australian geriatrician and former World Health Organisation consultant Dr Ludomyr Mykyta said.

"They're expected to spend money that essentially isn't going to be profitable," he said.

(1 US dollar = 1.1010 Australian dollar) (Reporting by Byron Kaye; Editing by Stephen Coates)