Editor’s blog Monday 9 August 2010: EXCLUSIVE - Health Secretary bought IC's Dr Foster Intelligence shares for £8M in early July
The cloudy future of Dr Foster Intelligence?
A Health Policy Insight exclusive
- Health Secretary bought the NHS Information Centre's share in Dr Foster Intelligence for £8 million on 9 July; yet no announcement was made
- The NHS Information Centre and DH's reporting of Dr Foster Intelligence share ownership is difficult to unpick
- Dr Foster Intelligence's £1.5 million operating profit for 2009 (half of which went back to the public sector) was less than 7% of DFI's £22.1 million revenue in that year
- Dr Foster Intelligence returned £8 million in cash to its shareholders at their request on 1 April 2010: £4 million to the NHS Information Centre and £4 million to Dr Foster LLP (this was not a dividend payment, contrary to previous information supplied by DFI). In a separate deal on 1 April 2010, DFI purchased Dr Foster Research from Dr Foster Holdings for non-voting and non-dividend shares
This announcement of a review of Dr Foster Intelligence, to be conducted by KPMG, raises a plethora of Interesting Things.
Interesting Thing Number 1: The apparently junior shareholder is driving this review
The first of these is about the DH as minority shareholder appearing to drive this review process.
The NHS Information Centre, which is a surviving DH arms' length body (a special health authority), transferred its shares in Dr Foster Intelligence (DFI) to the DH on 9 July 2010 - very quietly.
Or to put it more accurately, sold them to Health Secretary Andrew Lansley for £8 million. As you will read below.
Interesting thing Number Two: The two parties apparently disagree on who owns how much of DFI (but it's a technical issue)
The press release states that "The NHS Information Centre transferred its shareholding to the Department of Health on 9 July 2010. The Department of Health owns a 48.75 per cent stake with 51.25 per cent held by Dr Foster Holdings LLP".
Yet the Information Centre's Annual Report 2009-10 gets round to mentioning DFI on page 23 of 58, and reveals that "the issue of a share option scheme had diluted the IC's holding to 47.5%". It adds that events following the end of the balance sheet period further reduced the IC's stake of the DFI joint venture to "46.4%, although the NHS IC retains 50% of the voting rights".
Confused? You will be.
Aspects of this discreperancy were explained to me by a helpful and patient DFI press spokesman - the 47.5% figure in the IC's Annual Report represents a 50-50 NHS IC - DFI split of 95% of the shares - the other 5% were put into shares for Dr Foster Intelligence staff. None of that 5% have ever been taken up, but in legal terms, they must be classed separately. The term "fully diluted" represents the need for legal and accounting definitions of shares to be expressed in different ways.
Dr Foster Holdings LLP therefore appear to own 53.6% of DFI. But in voting and dividend share terms, the IC / DH shareholding and the Dr Foster LLP shareholding have remained equal. The new categories of shares created in order for Dr Foster Holdings and the IC, in their joint venture guise as Dr Foster Intelligence to buy Dr Foster Research (from Dr Foster Holdings) only have a value upon sale.
On 1 April 2010, Dr Foster LLP (Dr Foster Intelligence’s holding company) acquired Dr Foster Research Limited (DFR) in a share-for-share exchange. For the year ending 31 December 2009, DFR generated revenues of £1.9 million.
Interesting Thing Number Three: The money is confusing, but even so, DFI's operating profitability has not been good
The press release states that DFI made £22.1 million in revenue in the year to December 2009. Yet its operating profit in that year was only £1.5 million, according to page 23 of the NHS Information Centre's latest annual report (from which a full quote follows below).
That is just under 6.8%. A commercially-minded business would seek to get an operating profit of over 20%.
Half of all Dr Foster Intelligence's profit returns to the public sector, under the original commercial arrangement creating DFI.
So low profitablility matters, significantly.
Here is a lengthy quote from page 23 of the NHS Information Centre's latest Annual Report, about DFI and money:
“(DFI’s) Turnover has reduced in the 12 months to December 2009 over the previous year as a result of the loss of the NHS Choices website development contract. However, its core business turnover continued to grow, enabling an improved operating profit of £1.5 million (2008 – £1.4 million)
“In accordance with the provisions of IAS 31 (Joint Ventures), we have treated our investment in the DFI joint venture as a fixed asset investment, less any amounts written off. This has been subject to a valuation at the balance sheet date. This valuation carried out by PriceWaterhouseCoopers LLP supports the board’s opinion that the carrying value of £12 million remains appropriate.
Events after the balance sheet date
“On 1 April 2010, the NHS IC received £4 million being its share in a capital reduction of Dr Foster Intelligence Limited. On the same date, Dr Foster Intelligence Ltd acquired 100% of the capital of Dr Foster Research Limited, a wholly owned subsidiary of Dr Foster LLP, the acquisition price funded by the issue of 13,253 shares in Dr Foster Intelligence Limited. The NHS IC fully diluted share of the joint venture as a result of this acquisition reduced to 46.4 per cent, although the NHS IC retains 50 per cent of the voting rights.
“On 9 July 2010 the NHS IC shareholding was transferred to the Secretary of State for Health for a consideration of £8 million”.
Here is an interesting point to note: PWC, who approved the self-valuation by the Information Centre's board that Dr Foster Intelligence is worth £12 billion, are noted on the following page 25 of the IC's Annual Report as being the IC's internal auditors in 2009-10.
So. Come with me to April 2010, and Dr Foster Intelligence returns £8 million in cash to its shareholders. £4 million is returned to Dr Foster LLP and £4 million to the NHS Information Centre (this was previously described as DFI's first ever cash dividend of £8 million, based on erroneous information provided by DFI).
Separately, in April 2010 Dr Foster Intelligence bought Dr Foster Research from Dr Foster Holdings for 13,253 non-voting, non-dividend shares. (The previous shareholders retained their previous voting and dividend shareholdings).
Interesting Thing Number Four: There is some history here (to put it mildly)
The deal struck between the Information Centre and Dr Foster Limited that created DFI was not a competitive tender. You will remember that the NAO reviewed the deal in 2007 and concluded that "without a competitive process the Information Centre has no fair comparisons or benchmarks to demonstrate that the joint venture with Dr Foster Ltd was the best structure to meet its needs, or that it represents good value for money".
The NAO review also concluded that "the Information Centre paid between 33 and 53 per cent more than the advisors highest indicative valuation based solely on the acknowledged strategic premium of between £2.5 and £4 million", and added that metrics of future unspecified benefits postulated by the Information Centre were not measurable since no baseline was set.
The NAO report also stated "We are concerned by the Department's decision to pay Dr Foster Ltd for advice on the informatics market, at a time when they had already entered into discussions about the possibility of some form of commercial partnership".
The Commons Public Accounts Committee also produced a report which was highly critical of the DFI deal, whose then-chair Edward Leigh MP described it as "a backroom deal". The PAC report also noted that DFI made a £2.8 million operating loss in its first financial year, against a projected small profit.
It was quite clear that various people inside and beyond the DH felt they had been 'had' by the DFI deal. The machniations and commercial issues around the deal formed a key part of the IC's former CE Professor Denise Lievesley's unsuccessful employment tribunal case against the IC, which sought to overturn a confidentiality agreement she signed on the termination of her job.
Dr Foster Intelligence's loss of the NHS Choices contract to Capita in 2008 was widely perceived to have been in part a settling of scores on this account.
Dr Foster subsequently set up their own site, Dr Foster Health as a rival to NHS Choices.
In January 2010, the contract for supplying clinical indicators to NHS Choices, still held by Dr Foster Intelligence, was re-tendered and awarded to IMS Health.
The statement, in which DFI CE Tom Moloney (former supremo of HSJ owners EMAP, pre-the APAX private equity / Guardian deal) states, "With the increased emphasis on healthcare information in the White Paper, this is the right time to embark a review of Dr Foster Intelligence. We will work with our partners to consider the best options for the company and the shareholders" should therefore raise great interest and not a few questions.
1. Why did the Health Secretary who plans to commercialise the Information Centre buy its best asset from it?
2. Why did the Health Secretary want to buy a stake in Dr Foster Intelligence, when it is so unprofitable?
3. Which shareholder's interest is the review aiming to serve?
Whether this is a serious matter, one thing is clear: transferring the public-sector-funded stake in a commercial company (Dr Foster Intelligence) from an arms' length body to the Secretary Of State For Health is in no way, shape or form decentralisation - in theory or practice.
Another question asks itself: why would Health Secretary Andrew Lansley do this?
I can see why the NHS Information Centre would want this outcome - they have now got back the £12 million they paid for their share in Dr Foster Intelligence - £4 million in return of cash in April 2010, and £8 million from the Health Secretary for their share in Dr Foster Intelligence.
But what could be Lansley's motivation for that £8 million purchase?
This is of course pure speculation - but perhaps Lansley or his people may have acted because of views on the NHS IC's ability to be commercialised while it retained its stake in Dr Foster Intelligence.
Hypothesis only. The reasons could also be about legal or contractual matters. Yet even if this hypothesis were the case, the Conservative policy on health is all about competition and becoming more commercial.
In that world view, selling the NHS IC's asset to the Secretary of State For Health, without finding out what the market might pay for it, appears to be an utterly bizarre decision.
According to this calculation, Health Secretary Andrew Lansley is worth two Steve Austins.
Note: This story was amended and updated at 17.24 on the day of publication, to correct an inaccuracy about the April 2010 dividend payment, which was £8 million in cash and was separate to the payment in shares made for Dr Foster Research. We are happy to correct this.
Note 2: This story was further amended and updated at 15.45 on 9 September 2010, following further inquiries and correspondence with the NHS Information Centre and Dr Foster.
The document setting out the arms' length body review stated of the IC:
Arm’s Length Body: Health and Social Care Information Centre
ALB Type: Special Health Authority (SpHA)
Role: Collects and provides health and social care information
Proposal: Retain, and put on a firmer statutory footing by establishing it in primary legislation. National repository for data collection across health care, public health and adult social care. Clearer focus on data collection, with a close working relationship with the NHS Commissioning Board.