THE Royal Bank of Scotland (RBS) is holding discussions about merging the Priory and Four Seasons, a move that would lead to a radical shake-up of Britain’s healthcare sector.

The merger would create a company with an enterprise value of least £2 billion and is seen as an elegant solution to RBS’s exposure to two heavily indebted companies. The bank has confirmed that discussions are taking place.

RBS acquired the Priory, the rehabilitation chain well known for treating troubled celebrities, when it took over ABN Amro. It is the biggest investor ahead of Lord Ashcroft, who owns 35%. The company now has debts topping £800m and its equity is worthless.

The Edinburgh-based bank is also lead lender to Four Seasons, the nursing-home giant. Not only is it exposed to the debt, it owns about £100m of “piks” (payments in kind), which yielded 22% and now have no value.

Philip Scott, the Priory’s chief executive, is involved in the talks. One of the parties that needs to be addressed is the Qatar Investment Authority. The QIA owns Four Seasons, but its equity has been wiped out and it is threatening to put the business into administration.

The QIA bought the firm with its British investment partner Three Delta, headed by Paul Taylor. That partnership has now been dissolved and, since Taylor left, the management of Four Seasons have become concerned about what QIA will do.

The directors are believed to have appointed their own legal advisers to ensure they are not running a business while it is insolvent.

Four Seasons owes £1.3 billion. One option is for the banks to swap their debt for equity in the enlarged company. This would give it time to trade out of its difficulties.

The business would become one of the largest providers of healthcare in Britain and benefit from huge savings by combining the two operations. It could also be floated on the stock market when conditions improve.

Paul Saper of LCS International, a healthcare consultancy, said: “The banks have a lot of problems to sort out. The strategy whereby companies split their operating divisions from their property assets has back-fired spectacularly.”

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