Australasia’s largest DSO enters takeover arrangement

Jeremy Booth, DTI

Thu. 12. December 2019

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AUCKLAND, New Zealand: After a number of offers, the directors of Abano Healthcare Group have capitulated to a bidder and entered into a scheme of arrangement for a takeover of its extensive network of dental offices across Australia and New Zealand. If approved, the takeover bid would see an entry into the dental market in Australasia by the former majority shareholder in the largest dental support organisation (DSO) in the US.

Dental professionals in Australia and New Zealand are no strangers to the name Abano Healthcare. The Auckland-based dental group is the largest DSO in the NZ$11 billion (€7.1 billion) trans-Tasman dental market. It owns 116 practices across seven Australian states and territories, and these operate largely under the brand Maven Dental Group. In New Zealand, Abano owns 123 practices, and patients are treated under the brand Lumino The Dentists. Together, Abano-owned clinics receive more than 1.1 million patient visits annually, and gross dental revenues for the 2019 financial year increased by 12% to reach NZ$338.9 million. While the advance of this corporate dentist may have some practice owners in Australasia concerned, private equity is backing the DSO.

Together, Abano-owned clinics receive more than 1.1 million patient visits annually.

Abano said in July that it had received a number of takeover bids, including a rebuffed offer from 1300 SMILES, which operates 31 dental offices in Australia. A deep-pocketed Adams NZ Bidco, which is the bidding vehicle of the New Zealand private equity firm BHG Capital and the Ontario Teachers’ Pension Plan (OTPP), reportedly outbid other vendors, including 1300 SMILES. BHG Capital and OTPP have offered to buy 100% of Abano shares for NZ$5.70 per share, representing an equity value of just under NZ$150 million and an estimated enterprise value of NZ$300 million.

At the Abano Healthcare Group’s annual shareholder meeting on 25 November, Chair Pip Dunphy told shareholders that the Abano board recommends the BHG/OTPP offer and that the final decision will rest with the company’s shareholders.

“After a nearly six-month process, a binding ‘whole-of-company’ offer was made by BGH Capital and Ontario Teachers’ Pension Plan to be implemented under a scheme of arrangement. A scheme of arrangement has to be approved by shareholders so it is you who will ultimately determine the outcome,” Dunphy said.

CEO Richard Keys confirmed to Dental Tribune International that Abano shareholders will vote on the acquisition at a meeting in early 2020. If approved, he said the offer will be settled before the end of April.

A difficult dental market in Australia led to takeover bids

Of the company’s 239 dental practices, 100 of them were added to the Abano banner in the last five years. But while this acquisition rate was favourable in the corporate dentistry world, the prospect of it slowing was enough to spark interest in a takeover.

Back in March, Abano announced in a note to shareholders that it would “pause” its active practice acquisition strategy in Australia, focusing instead on organic acquisitions only. “Trading conditions in Australia remain challenging and the performance of Maven Dental Group has been below expectations,” the company explained. Abano’s share price dropped following the announcement, and this led to at least 30 expressions of interest in acquiring all, or part of, Abano’s business. The expressions of interest came from parties across the Asia Pacific and North America regions. Acquiring dental practices had been one pillar of Abano’s two-pillared growth strategy (the second being a focus on revenue from and investment in individual practices), and this strategic backtracking led to analysts and news media casting doubt on past statements made by Abano.

One challenge in Australia for Abano has been the earlier retirement of dentists: “We found it challenging to replace retired clinicians,” said Chair Pip Dunphy. (Image: Denisbin, CC BY-ND 2.0 creativecommons.org)

In its 2018 annual report, the company had noted that there were around 9,000 private dental practices in the trans-Tasman market—“a huge pool of practices for acquisition and ongoing expansion”. Keys told the Australian Financial Review, in July of that year, that “The pipeline [for expansion] is certainly very good” and that the company had the long-term goal of growing its network so that it would number 600–700 dental practices.

At this year’s November shareholder meeting, Keys noted that the company had been facing headwinds in the dental sector, particularly in Australia. “Challenging economic conditions continue and are impacting on discretionary spending on dentistry,” he said. “There is increasing pressure from healthcare insurers to reduce prices and competitor activity from several dental corporates looking to build scale has increased the prices being asked by vendors, and thereby impacting on returns.” He explained that, while the dental market in Australia is more than ten times the size of that in New Zealand—and thereby offers more growth potential, it had taken longer than Abano had anticipated to achieve the scale and economies that the company had expected.

It remains to be seen whether a change in ownership would result in a reassessing of Abano's growth strategy in the Australian or New Zealand dental markets. The company’s performance in New Zealand remains favourable and no changes to its strategy in the country have been announced.

OTPP backing helped Heartland Dental double in size

The corporate dentistry model is big business in Australia and New Zealand, but the numbers in Australasia pale in comparison to those seen in North America: around 90% of dental practices in Australia and New Zealand remain in private ownership, while DSOs in the US control around one-third of all practices in the country. The main driver of growth among DSOs in the US has been the phenomenal capital that private equity brings to DSO-supported dental practices. As well as being able to offer attractive options to dentists, economies of scale also bring the latest technology and equipment to the dental office.

Heartland Dental has since reached the milestone of supporting over 1000 dental offices in the US.

Commenting on the December 2019 milestone of reaching 1000 supported practices, Patrick Bauer, CEO of Heartland Dental, said, “I believe we'll continue to grow”. (Image: MinJae Kim, CC-BY-2.0 creativecommons.org)

OTPP was the majority stakeholder in the largest DSO in the US until March last year. The pension fund paid a reported US$1.3 billion for a majority stake in Heartland Dental in 2012 and OTPP’s backing helped the DSO to more than double in size.

Heartland Dental supported 397 practices when OTTP took majority control of it. By April 2018, when OTPP sold its majority stake to the American global investment firm KKR for an undisclosed sum, the DSO supported 850 dental practices across 35 US states. Annual practice revenues at Heartland’s supported practices had reached US$1.3 billion by 2018, representing a 126% increase in the six years of backing by the pension fund.

Heartland Dental has since reached the milestone of supporting over 1000 dental offices in the US and its dental practices are now the national leaders in deploying intra-oral scanners and the Invisalign clear aligner. The DSO deployed 900 scanners last year into 91% of its supported practices—primarily the iTero scanner, made by Align Technology. Invisalign clear aligners are offered by 90% of Heartland Dental’s supported dentists, making the DSO the largest network of providers of Invisalign in the US.