Can Circle reduce debts, increase patient numbers and turn a profit?
Today is the first day of a new era for the NHS -- at least that is what Ali Parsa, former Goldman banker and CEO of AIM-listed Circle Holdings (LSE: CIRC), a private healthcare company, would say.
In November 2011, Circle signed a contract to run Hinchingbrooke Hospital, a NHS district general hospital in Cambridgeshire. The hospital was struggling with £40m of debt and falling patient numbers, and the deal with Circle was to take over the hospital for 10 years, starting in February 2012.
John Lewis for healthcare?
One of Circle's main selling points is that it is 49.9% of it is owned by its employees -- the staff who work in its facilities, which include private hospitals and clinics and an NHS day surgery centre in Nottingham.
At Hinchingbrooke, the staff and assets will remain under NHS control, but staff will be given the opportunity to earn shares in Circle based on their performance and seniority.
Not exactly John Lewis
Parsa likes to stress the similarities with John Lewis, but this is not the whole story. Hinchingbrooke will be run by Circle Health Limited, which is 49.9% owned by Circle Partnership (this is the employee-owned bit) and 51.1% owned by Circle Holdings (this is the listed company).
According to its website, Circle Holdings is 90% owned by investment funds, including Lansdowne Partners and Odey Asset Management, two large Conservative party donors. This has led to a certain level of criticism over the influences at work behind this potentially lucrative 10-year deal.
Is there money in hospitals?
Political controversy aside, is Circle a good investment?
Circle's goal is to move Hinchingbrooke Hospital into profit by increasing patient numbers and thus revenue. Over the 10-year deal, it is estimated that around £1bn of revenue could be involved, so the opportunities are sizeable.
If things go badly at Hinchingbrooke, Circle's maximum liability is capped at £7m, which should limit the potential downside for investors.
Circle only went public in June 2011 and it is forecasting annual losses for at least the next two years. However, its last interim report, which covered the period up to its flotation, showed rises in patient procedure numbers and revenues from existing facilities -- key metrics for Hinchingbrooke.
Investing at this stage is certainly a high-risk strategy, but if the company's growth can be part-funded with large public-sector contracts such as this one, it may offer a lot of potential.
If small-cap stocks like this appeal to you, Circle could certainly be worth a more careful look.
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