Michael Harrison's Outlook: Doughty Hanson checks out of Priory with a handsome profit - unlike the clinic's clients

Turning up the taps at BP's cash gusher - Littlechild turns poacher
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The Independent Online

Priory's private equity backers, Doughty Hanson, briefly considered going the IPO route in selling out, but advised by NM Rothschild, it didn't take them long to opt instead for a private sale. Four fully financed bidders were in at the final auction, though interestingly, the winner doesn't intend to keep the company at all, but only to refinance it, securitise the property and sell off the equity. Making money from corporate assets seems these days to be as much about capital restructuring as running the business. Chai Patel, the chief executive, will continue to do the latter.

Despite the relative buoyancy of the stock market and the success of some recent floats - most notably PartyGaming - the IPO market is proving a tough taskmaster. Yesterday RHM, maker of Mr Kipling cakes and by coincidence another company from the Doughty Hanson stable, was forced to cut its flotation price from an expected range of £1bn to £1.3bn, to just £875m to £975m.

Even then RHM has been obliged to underwrite the offer at the bottom of the range so as to give certainty of exit for the vendors. The sponsors feared they would otherwise be driven down even further in the road shows and book building. RHM and Priory have very different business profiles, but for Doughty Hanson the contrast could hardly be starker; it's been a struggle to get RHM away at all as an IPO, yet in a private sale the Priory has flown off the shelf, and at an excellent price too.

As it happens, Priory Group was always likely to be worth a great deal more in a private sale than as a stock market flotation. The Priory is being sold at an heroic 23 times last year's cash flow, giving Doughty Hanson a five-times return on its original equity stake for just three years involvement. There is quite a bit of debt left on the balance sheet too.

The public market would never have tolerated a valuation anywhere near this. So how come the private market reckons there is still money to be made from Priory's particular brand of rehab? Priory's celebrity clientele, from Kate Moss and Paul Gascoigne to Ron Wood, gives the company a profile to die for, yet the bulk of its business is from low key private medical insurance and NHS referrals.

These have made the company extraordinarily cash generative. It may seem callous to describe mental illness, addiction, anxiety and stress as a growth industry, yet Priory Group is right there in the thick of these modern ailments, and despite some recent adverse publicity, its revenues are still surging ahead.

That allows ABN to debt gear the company still further, again something that would not have been possible in the quoted sector where investors require the payment of dividends.

Even so, the price paid is a reflection as much of private equity coffers filled to the brim with investment funds and a general absence of obviously attractive deals to put the money into as the continued upside potential of the Priory. Private equity is being forced to take on ever more risk for ever less spectacular rates of return. There is also a growing trend in private equity to private equity transactions, which in itself is suspicious. For many investment bankers, once IPO specialists to a man, these transactions have become a main source of business.

There will always be a place and demand for the traditional publicly listed company, yet the attractions grow ever harder to see, both for the managers and the owners.

Turning up the taps at BP's cash gusher

BP could perhaps have chosen a more tactful week than one in which climate change is meant to top the agenda at the Gleneagles to announce its second-quarter trading update, yet the demands of the capital markets wait for no man and BP's quarterly update is always a keenly awaited statement.

This confirms BP's average selling price for Brent crude at $51.63 in the second quarter. The company is also still confident of meeting its production targets for this year and modestly points out that for every $1 a barrel rise in the price of Brent, BP makes another $500m a year in profits. Just by sitting there and doing nothing, BP is coining it as never before. As it is, BP's redoubtable chief executive, Lord Browne, continues to run the tightest ship in the business. Analysts expect profits to surge by another 25 per cent this year to an eye-popping $20bn.

The company has become such an infernal cash machine that it hardly knows what to do with its riches any longer. In past cycles, the money would have been sunk in new wells and extra capacity, thus accentuating the downturn in the oil price when the economy eventually hit the buffers. Not any longer.

Scarred by past experience, BP and other oil majors are today much more cautious in sanctioning big increases in development and production. Indeed none of them is replenishing reserves even at the rate they are expending them, let alone finding new sources of oil sufficient to allow for a significant increase in production.

Against this backdrop, BP's still cautious view on the outlook for the oil price is a bit of mystery. The company is sticking religiously to its $20 benchmark for new development, with anything above that deemed uncommercial, despite the fact that the price hasn't been anywhere near that low in years. Nor does the company see the present, inflated price holding for much longer.

If the world economy is indeed set for a pronounced slowdown, then logically Lord Browne's view ought to be right. Yet lots of pundits expect higher prices still before there's any relief, and if known reserves are already close to peak production, then there's every reason to believe that with growing demand from the developing economies of Asia, the price will remain permanently high.

For those lobbying the G8 on climate change, this is both a blessing and a curse. Permanently higher oil prices ought to encourage greater efficiency in oil use; yet at the same time it might eventually encourage Big Oil to throw caution to the wind and start investing heavily in new sources of supply once more. This requires drilling in ever remoter and more environmentally sensitive places.

Still, for the time being, Lord Browne seems keener to return his excess capital to shareholders than invest it. Last quarter alone, $2.1bn was spent on buy-backs. Add in dividends, and at this rate it would take BP little more than 16 years to pay back its entire stock market valuation. No wonder the shares are again approaching their all-time high.

Littlechild turns poacher

Better the sinner that repenteth.... Back in the days when he was the UK's electricity regulator, Professor Stephen Littlechild imposed a panoply of rules, regulations and pettyfogging conditions on energy suppliers, ostensibly designed to protect the consumer. These included the right to terminate a contract at no more than 28 days notice and the requirement to maintain a myriad of different payment methods.

Now that Professor Littlechild has been re-incarnated as a consultant to the industry, he's belated recognised that, far from benefiting the customer, much of this regulatory spaghetti has the effect of strangling new entrants at birth, resulting in prices being higher than they ought to be. With the zeal of a reformed alcoholic, he now wants his successors to re-write much of the rule book he was responsible for, arguing that where British Gas, Powergen and the rest of the Big Six face competition from smaller, nimbler suppliers, bills are generally lower. Quite so.