Grey gold is the cynical expression given by some journalists to elderly residents in old people’s homes. A growing number due to the process of extending human life..
Changes in world population structure
Some lonely elderly people, most of whom are self-sufficient and could stay at home, find new social stimuli here. However, most of them live there because they are not self-sufficient and their families cannot look after them. As we know, lack of self-sufficiency can vary greatly, from situations that are easily managed at home to extreme situations, when there are serious mobility difficulties and/or forms of dementia. Sooner or later, these are sad issues that the luckiest among us, those who do not die first, will have to deal with together with their families.
Around these needs there is a growing activity, once delegated to state institutions and now managed in a mixed public-private way with regulations that vary from country to country. It is an industry that is described as thriving and is loved by the stock market, which gives companies in the sector fat valuations, reflecting very high growth expectations. However, on closer inspection, it is not so prosperous. Margins are low and unstable. The best companies in the sector have returns on capital of around 5% and a margin on sales (ROS) of 6%, which forces the sad strain of having to reconcile people’s well-being with the budget. This leads and has often led to controversy and even, in the most serious cases, to fines or even criminal convictions. In Italy, where the activity is often delegated to small and medium-sized companies, it is normal to read about cases of ill-treatment of the elderly and the closure of care homes. In Germany, a research carried out by AOK, a large insurance company, has determined that in more than 60% of the cases, the 13,000 old people’s homes in the country provide absolutely inadequate services, although the cost always exceeds 3000 euros per month, half of which is paid by the patient. France is one of the most advanced countries on this front. Elaborate legislation based on the EHPAD (Etablissement d’He’bergement pour Personnes Ag) has helped to develop companies of cyclopean dimensions and international presence, which manage to combine sustainability of the business model and quality of services. At least apparently.
On 26 January, the first book by the young investigative journalist Victor Castanet was published by the small publishing house Fayard, part of the French publishing giant Lagardere. The book has a macabre title, Les Fossoyeurs (The Gravediggers) and focuses on a series of alleged negligence and mistreatments that took place in one of the retirement homes of Orpea, the French company that manages over 1,000 retirement homes and clinics in France and abroad, the world’s largest player in the sector. This book sparked public outrage and the collapse of Orpea’s share price on the market, as well as sharp weakness in other stocks in the sector.
Here are some of our analyses.
Orpea. Founded in 1989 by Dr Jean-Claude Marian, a psychiatric doctor, has grown from a single retirement home to 1156 homes by the end of 2021 (around 116k beds), of which around 586 are in France and the Benelux countries and the rest in other European countries, South America and China. It employs almost 70k people (a staff/patient ratio of 0.64 in retirement homes and 0.94 in clinics). It grew organically until it was listed in 2002 when it had a turnover of around €150m, and then grew through significant acquisitions to reach a turnover of €4.2bn. Growth has been exceptional but, counter-intuitively, profitability has declined due to tighter regulation. Orpea, which has always been profitable since its creation, recorded an ROS of 7% in 2002 and 6% in 2019 (pre-covid) as well as in 2021. An ROE of 5% on equity and, before the recent share crash, a return on equity (inverse of P/E or earning yield) of less than 3%, implying very little risk and/or faith in future growth. The company is industrially managed, as is inevitable. Every cost is planned, as well as the protocols of guest washing, cleaning, cooking, visits, etc. As mentioned, a 6% overrun of the budget would lead to a loss. The company claims a 92.4% satisfaction level from their customers certified by an external company.
Below are 2 slides taken from two Orpea presentations. One with the key figures of the business and the other with the points of their 2023 plan.
Source: Présentation PowerPoint (orpea-corp.com) July 2021
Orpea – Piano 2023
Source: Présentation PowerPoint (orpea-corp.com) September 2021
The book. We read the book. We did not have the impression that we were dealing with an objective study, but with a dramatised story, in search of audience and readers rather than truth and answers. A product not far removed from Rai 3’s Report, so loved by viewers, but focused more on sensationalism than the search for truth. I myself was a Report lover, inflamed by the programme’s ability to bring out injustice. Until the programme itself talked about something I knew well. At that point I could see its superficiality and blatant justicialism, with an apparent desire to attract rather than inform viewers. On the other hand, in order to attract attention it is not enough to identify things that are wrong, you have to find or create something amazing, capable of gluing people to the newspaper, book or television and getting them talking at the bar. Although we are sure that many of the events recounted have really happened, we have the impression that they have been deliberately exaggerated and presented as the norm of things within Orpea’s structures. We have the perception that there is a tendency to eviscerate all the problems without ever mentioning the things that are going well. The author seems never to have found a satisfied employee or former employee. And to think that Orpea has 70k employees who all think they work for a rogue company is strange to say the least.
The first part of the book focuses on the testimonies of former employees of this shelter in Neully-sur-Seine. Here, what emerges is that the residents are treated badly and in some extreme cases even culpably allowed to die. There is even a case of ‘euthanasia’ not requested by the patient or the family, which in my house is called murder. All this is constantly pointed out that the guests were paying between 6 and 7 thousand euro a month. Trying to play it down, it reminds me of the beginning of Woody Allen’s film Annie and I, when the background voice brings up the story of two old ladies in an old people’s home. One says to the other, ‘the food here is absolutely inedible’ and then adds, ‘and they give you so little…’. What is the point of methodically treating badly, risking losing or even killing patients who pay you so much? The author then cites a case in which, after extreme harassment of their loved one, her family decided to take her away, but she objected because she now had friends here… Finally, we cannot fail to notice a sentence by the author which reveals his superficiality by linking the strong growth in turnover, linked to the increase in the number of homes managed by the elderly, to savings on nappies and other consumer goods. Margins, and not turnover, benefit from indiscriminate cost cutting and here the margins, as already mentioned, are very modest.
In the second part of the book, the anguish grows further and the ‘Orpea system’ is mentioned. A system where management control occupies a central place and this, again in our view naively, is described as a diabolical element. As if this does not also count for organising hospitals, schools, fire brigades, police, social services, pharmaceutical companies, security control services, etc. Again, people’s sensitivities are exploited to create astonishment and/or horror. This part also analyses the supplier rebate process, a process borrowed from the large-scale retail trade whereby suppliers of large customers pay discounts to the customer at the end of the year. We do not want to go into technical elements here, but these practices are subject to annual certification by independent auditors and used by all companies in the sector.
In the third part of the book, the alleged harassment of the company towards its employees is analysed. Here, too, there is perhaps a tendency to go to extremes, speaking of widespread depression and a desire to commit suicide. If this were true on the scale described by the young journalist, then the company would deserve a place among the great criminal masterminds of our time for having managed for so long to commit crimes, abusing a staff of 70k people without getting caught, until the arrival of the good Victor Castanet to whom the Western world at this point owes a lot.
In the fourth part of the book, he describes how visits by the authorities are few and far between, and how this gives them time to prepare. Moreover, inspections are rare and often limited to cases where there are complaints from patients or families. Given the situation outlined here, however, there should be complaints, and therefore inspections, galore. We then focus on a clinic that has objectively horrible Google Avis reviews. However, we checked the same site, and there are quite a few Orpea clinics with very high ratings. There still seems to be a desire to impress rather than to represent the many problems objectively.
The political reaction. The French political reaction was worthy of the worst populism we find in our political class and the incipient presidential elections have certainly contributed. We listened very carefully to the two-hour, 20-minute parliamentary hearing in which the Social Affairs Committee heard from Orpea’s new CEO (and former non-executive chairman of Orpea’s board) Philippe Charrier and the group’s general manager for France, Jean-Christophe Romersi (here is a link to the video of the hearing). Around 40 questions were asked by as many MEPs on the committee. Each question was preceded by phrases of general disgust at the alleged irregularities committed by the investigated company, although today we are far from having a precise picture of what really happened, as well as remarks on their careful and personal supervision of the facilities for the elderly in their own constituency. One has to take advantage of a few minutes of the election campaign… Grey gold seems to interest politicians even more than it does Orpea and Castanet. The two unfortunate men tried to answer the parliamentarians’ questions, but it was more of an execution than an investigation. And the hearing ended with the two men being cut off, with the chair of the committee, Fadila Katthabi, reproaching them for not having answered… A charade. However, what was said by the two leaders made absolute sense. They denied that there is any ‘Orpea system’ based on the mistreatment of guests. They denied many of the alleged procedures mentioned in the book. They did this on the eve of 2 independent and 1 ministerial enquiries that are starting. If they lied they are kamikaze.
The writer. A young man in his early thirties, Castanet worked for a few years for large companies such as Canal+ and then set up on his own to carry out investigations and sell them to newspapers. So far unknown, the journalist has his own website where you can find these investigations (VICTOR CASTANET Journaliste Réalisateur) and other news about himself and his work, which consists of reportages, articles and documentaries.
The risks. A company exposed to such publicity inevitably suffers. Whichever way it ends. At least in the short term.
If you have doubts about the soundness of your bank, you tend to take your money out. The operation is simple. Moreover, it is complicated to analyse the accounting situation of a bank and you easily follow rumours and articles. Moving an elderly relative out of a nursing home is not so automatic. Here the problems encountered are easier to analyse. Unlike in a bank, the contact person in the facility speaks a language most people understand. Finding an alternative destination is not as easy as finding another bank. So the so-called ‘bank run’ is unlikely here.
Nursing homes work through licences that can be revoked. However, they are unlikely to revoke the licences of a public company (80% of the company is on the market and the rest in the hands of the Peugeot family foundation and a Canadian pension fund). In the event of very serious shortcomings, it is more likely that the board of directors and management will be replaced or, at the very least, the company will be placed under commission for a while. If you search on the Internet in Italy there is one scandal after another in these institutions with cases of serious abuse. In a society with 70,000 employees we find it much more difficult to institutionalise torture and delinquency. In the most serious cases, a fine is imposed and a number of perpetrators are identified for prosecution.
Although anything is possible when politics is involved, we believe the risks of bankruptcy or expropriation are very limited. However, the company’s ability to grow now seems compromised and with it its majestic multiples, which at €100 per share made it one of the most popular companies in the market, now at €34 it is worth 11/12x earnings after having further lowered its already meagre margins following the ongoing scandal.
Conclusion. We are not fond of journalists like Victor Castanet looking for sensationalism and notoriety. The area covered is one of the most sensitive and controversial. There is a shortage of resources to care for people who are no longer self-sufficient, and the tendency is often to look the other way. We believe that large companies like Orpea generally do a good job, making procedures efficient and managing to guarantee a positive, albeit low, return on capital. State management is certainly more expensive and inefficient. If it is true that more resources should be devoted to the dignified ageing of all elderly people, this can be said for the education of children, care for cancer patients, care for the handicapped, public safety, etc. The resources are lacking. Elderly people with dementia are extremely delicate to care for and their numbers are exploding along with life expectancy. The solution lies in more home care, more immigration of caregivers, more training. Large, industrially run companies like Orpea guarantee greater efficiency and lower costs. The enormous enthusiasm that existed about the industry before the book allowed the company to finance itself for a song and have a very low cost of capital. This was a boon to the community, which could then offer standardised services at a controlled cost to the community. This scandal will lead investors to demand higher returns with low margins and high risk. This means low multiples, at least for now, and less money to invest.
We bought 0.5% of Orpea for the NEF SDG fund during these days. We didn’t have anything on the sector either because it has always been much talked about in all countries for the reasons we have talked about, or because it was too expensive. We preferred to be invested in companies exposed to diagnostics, such as Fresenius, CVS, Walgreen’s, Laboratories of America, Qwest Diagnostic, etc, less risky companies exposed to secular growth and low multiples. Today we are stretching a sector that is functional to the achievement of the SDGs and extremely important for the sustainable development of society. The tendency of investment funds is to get rid of companies as soon as a scandal emerges in order to avoid being seen to have them in their portfolios. We do the opposite here. We know that a scandal, if proven, leads to the clean-up of the company’s management and a rewriting of its procedures, to the benefit of the community. We believe that Orpea represents nothing more than the industrialisation of an industry that is very expensive to run otherwise. But we also believe that improvements will be made, albeit, as mentioned, at a significant cost in terms of resources available for future growth. There is no such thing as an ideal world, but today we are pleased to have a small holding in our portfolio in a sector which, after a difficult phase, will return to its path of positive growth and whose valuations today incorporate the inherent risks well, while overlooking the long-term opportunities.