Summary

The level of merger control risk in the children’s residential homes market is currently regarded by Aldwych Partners as low to moderate. Pockets of concentration in local markets could mean that mergers between the largest operators require divestments to secure Competition and Markets Authority (CMA) clearance. Transactions involving smaller operators with a regional focus may also be at risk of CMA intervention.

Local Authority (LA) customers are increasingly sensitive to concentration among suppliers of care services, as shown in recent media and parliamentary committee reports. These concerns could lead to a broader CMA inquiry into children’s services. As a result, market participants should exercise care when formulating pricing and other strategies.

National overview

Around 30% of private and voluntary (independent) sector children’s residential homes in England are owned by the ten largest operators. This appears to be a relatively low level of concentration compared to, say, children’s fostering services where the ten largest operators have a 60% national market share.

Operator Share of children’s home spaces in England
CareTech Group 9%
Keys Group 5%
Priory Group 5%
Hexagon Care Services 2%
Witherslack Group 2%
Outcomes First Group 2%
Horizon Care 2%
Care Today 1%
Homes 2 Inspire 1%
Esland Group 1%

CareTech is the largest operator of children’s residential homes in England, with around 180 homes. The next largest, Keys Group, has around 90 homes while Priory Group has around 70 homes. Many of the largest operators offer both children’s homes and fostering services (e.g. CareTech, Priory, Care Today and Outcomes First) and/or specialist schools (e.g. CareTech, Priory, Hexagon, Horizon and Witherslack).

Merger control risks

CareTech’s acquisition of Cambian in 2018 is the only children’s homes transaction to be reviewed by the CMA. The lack of CMA reviews in the sector to date indicates that merger control risks have been relatively low.

The CMA’s decision on CareTech/Cambian set several benchmarks against which merger control risks can be assessed for future transactions. In particular:

  • LA-operated children’s homes are not regarded by the CMA as direct competitors to independent sector children’s homes (consistent with the CMA’s approach in fostering services and mental health).
  • The competitive effects of a transaction should be separately assessed in each of:
    • children’s homes for children and young people with special educational needs and disabilities (SEND);
    • children’s homes for children and young people with social, emotional and mental health (SEMH) conditions, further segmented by:
      • sexual trauma;
      • harmful sexualised behaviour;
      • deafness; and
      • general SEMH;
    • children’s homes for children and young adults aged 16+.
  • Competition between children’s homes occurs over a 20-50 mile-wide area.

LA-level market shares (without segmenting by home type) show that nearly two thirds of LAs in England have a single provider that owns more than 30% of total capacity. Half of these (i.e. one third of all LAs) have a single provider that owns more than 50% of total capacity. A strong LA-level market position is held by 70-80 providers across 97 LAs. (In some LAs, more than one provider has an LA-level market share of more than 30%.)

Children’s homes – market shares by local authority area

High market shares at an LA-level potentially point to local markets that are more concentrated than national market shares suggest. LAs, however, are typically smaller than the 20-50 mile geographic market identified by the CMA (which means that LA-level market shares may overstate the level of concentration in local markets). On the other hand, the LA-level market shares set out above do not segment children’s homes by specialism (which means that they may understate the level of local market concentration in some specialisms).

Children’s homes – market shares around Bristol

A closer look at the Bristol region, based on four LAs (Bristol, Bath & NE Somerset, North Somerset, South Gloucestershire), shows how high LA-level market shares can, but do not always, translate into high market shares using the CMA’s segmentations. Each of the four LAs has an operator that owns more than 30% of children’s home capacity in that LA (and in three LAs it is more than 50%). However, once the CMA’s segmentation is applied (aggregating capacity over the four LAs and segmenting by the six specialisms identified by the CMA) only one operator continues to hold a market share greater than 30% (Aurora, with 45% of SEND homes).

Two operators have market shares of around 20% in SEMH general, one of which (Hexagon) had a substantial market share at an LA-level while the other (Keys) did not. We did not identify any children’s homes in this region in any of the other four specialisms identified by the CMA.

LA-level market shares CMA market segmentation
LA Operator Share of capacity Segment Largest Operator Share of capacity
Bristol Headway 100% SEND Aurora 45%
Bath & NE Som. Action for Children 56% SEMH general Hexagon and Keys 21% each
N. Som. Hexagon 50%
S. Glos. Aurora 38%

The CMA’s market segmentation indicates that combining Aurora with any other operator of SEND homes in the region would be sufficient to warrant a closer look by the CMA. A combination of Hexagon and Keys may also result in the CMA taking a closer look (given their combined market share of 42%). In both cases, though, any competition-related concerns seem likely to fall away with a wider geographic area (i.e. 50 miles) given the larger number of providers present. For this reason, we believe that many transactions are unlikely to result in competition-related concerns.

Merger control risks will be greatest where both parties have a strong presence in the same region and in the same specialisms. Parties should be particularly sensitive to competition risks arising from combinations of operators with a significant presence in areas such as: Cornwall/Devon; East Kent; Blackpool and surrounds (i.e. the Fylde Peninsula); Southend and surrounds; coastal East Anglia; East Riding of Yorkshire; and North Lincolnshire. The geography of these regions means that they tend to be more susceptible to merger-related concerns in local markets.

Market study risk

In addition to merger-related competition risk, there is some risk that children’s residential care, and children’s services more broadly (including foster care and specialist schools), may be the subject of a CMA market study.

A market study allows the CMA to take a broader look at a sector where there are concerns that markets may not be working well. Depending on what the CMA finds, it can take consumer or competition enforcement action or investigate further. For example, the CMA’s care homes study led to consumer enforcement action while the private healthcare investigation saw the CMA seek to force the divestment of hospitals by HCA.

In May 2019, the House of Commons Housing, Communities and Local Government Committee said that the CMA should investigate the children’s residential care market. This reflected concerns expressed by LAs and other sector stakeholders about increasing prices and limited choices for LAs seeking to place children.

The CMA will not carry out a market study in response to every request, and there are good reasons to believe that price increases in children’s services are the result of increasing demand and constrained supply. (In these circumstances, price increases are what should be expected in a well-functioning market.) However, pressure is building and at some point operators of children’s homes may need to engage with the CMA. Given this, we advise market participants to exercise care when formulating pricing and other strategies.

A health warning…

This note provides a high-level assessment using publicly available data. While we believe the broad conclusions in this note are correct, the individual numbers presented in this note are subject to correction.

This post is available for download as a PDF: Children’s Homes – competition risk assessment