Momentum Matters – M&A Transactions in Perspective

There has been much press about the elevated level of mergers and acquisitions (M&A) activity in the residential aged care sector in recent months. 

This is consistent with the survey we took in February, when we asked organisations whether they would like to be on our register of acquirers. More than 120 organisations confirmed they are “in the market” to grow through acquisition (Merger or commercial transaction).

Does this elevated activity mean providers are shunning new developments? If so, why?

What’s changing – and what isn’t

Consider what will change from 1 November 2025:

1. Regulatory compliance will be more onerous, and with this comes the perception that it will be more costly.
2. Increased capacity to generate accommodation income from self-funded residents, through:
   • Higher base / RAD prices
   • Reintroduction of RAD retention
   • Indexation of DAPs
3. Additional Services and Extra services to be replaced by Higher Everyday Living Fees (HELF)

Consider what is remaining the same:

1. Profitability of care will continue to be highly constrained by Government policy and funding
2. Base profitability from hospitality remains constrained
3. The time it takes to acquire a greenfield site and develop a new facility remains at around 4 years
4. The outcome of the review of the Accommodation Supplement has not been delivered, so the supported payment remains uneconomic

How does the environment impact acquisition vs development

If you are a board or CEO who believes in the sector’s long-term viability and sees an investment opportunity, you have two pathways for growth:

• Acquire
• Build

If you seek to acquire, then finding a suitable opportunity / target can be challenging, and acquisitions often involve competitive processes. However, acquisitions reduce the payback period by around 3 to 4 years. Due diligence can mitigate the risks, and the net outlay is often significantly lower.

With the underlying shortfall in development activity and lifting of the RAD limit, we anticipate high occupancy leading to both revenue and capital inflows. In simple terms, acquisitions are relatively low-hanging fruit, providing relatively quick payback at relatively low risk.

Development can be either greenfield or brownfield. The hurdles include:

• Access to affordable land
• Planning and approval process
• Funding and scheduling construction, if you can find a builder
• The relative cost of construction compared to acquiring a currently traded-up facility
• Initial losses during commissioning and trade-up
• The economics of operating a new facility, particularly the impact of the accommodation supplement
• For brownfield sites, add in the losses and disruption during the refurbishment process

Which is the better approach

When you weigh up the issues between acquisition and development, it becomes self-evident that for organisations that see a future in the sector, the quickest and easiest pathway to growth is through acquisition. 

Looking at new developments, it’s well-reported that there have been very few new places coming online in recent years. Given the delay between the decision to proceed and commissioning, we anticipate this will continue for at least another 3 years. If this is correct, then it suggests that we are in a market that favours sellers with respect to prices and buyers with respect to their ability to increase resident base charges - accommodation prices and HELF.

We think it is unsurprising that we are seeing more merger and acquisition activity. We also believe that development activity will progressively increase, and that this will be the longer-term trend, as M&A does not expand supply. Essentially, we believe supply and demand will find a balance over time. When supply is lagging, prices tend to be favourable to providers. Overall, we see a bright future for at least the next decade.

Things to do and not do

If you are considering either an acquisition or development approach to growth, the following tables may be helpful.

Key considerations for acquisitions:

Most M&A transactions involve some form of competitive process. In this context, it is critical to understand that any organisation looking to dispose of a facility or to merge its operations has a problem they are seeking to solve or an outcome they are seeking to achieve. 

This outcome is unlikely to match the outcome that the acquirer is seeking to achieve. For example: In commercial transactions, vendors typically look to maximise value, and the buyer is looking to acquire at a price that provides short and long-term upside.

In a merger, the vendor is likely looking to cover a deficit in their capability or capacity, while acquirers tend to be looking mostly for scale. This can often lead to a mismatch in motivations.

Tip: To increase your chance of success, focus on discovering the driver of the exiting party and demonstrate how your organisation either solves their problem or addresses the outcome they seek to achieve.

Key considerations for developments:

At first glance, it might appear that development is a less complex pathway; however, there are many unknowns and uncertainties depending on where you are in the process. These uncertainties increase the risk of an adverse outcome. This is one reason that can lead organisations wishing to grow to seek our merger and acquisition opportunities.

Tip: Develop an investment-based assessment model to ensure you do not destroy value.

The challenge with deal momentum

Whether you are buying or developing, there is a significant investment required from your team. Once this investment begins, there is a risk that people may start to downplay the risks and overestimate the upsides. We refer to this as deal momentum. 

To manage this, proper oversight by your governing body or a delegated committee independent of the project working group is essential to ensure sound risk management and project governance for any opportunities being considered.

Looking to grow or exit?

If you are looking to grow, our team can help you maintain project momentum. Our services include:

• Buy-side mandates that help you identify merger and acquisition opportunities before they come to the market
• Feasibility studies on greenfield and brownfield projects
• Business cases, including recommendations on financial operating parameters
• Sell-side support if you are looking to exit an asset or the sector

To discuss what this environment could mean for your organisation, contact us for a confidential conversation with one of our advisors.