Deal focus: BGH taps LP expertise for Australia, NZ dentistry deal

The starting point for BGH Capital’s buyout of Abano Healthcare, operator of dental clinic chains in New Zealand and Australia, was the $1.3 billion acquisition of US-based Heartland Dental by Ontario Teachers’ Pension Plan (OTPP) in 2012. 

The Canadian pension fund sold a majority interest in the business to KKR last year, retaining a minority position, but there was still a wealth of knowledge BGH wanted to access.

“It’s a good example of how an LP can be useful in a deal situation,” says a source familiar with the transaction. “BGH could have done the deal on its own – at least the first step, there are likely to be other investments – but it was thought sensible to have the relationship with OTPP upfront. They went to them early and said they wanted to work with them on it. There are no other co-investors.”

BGH and OTPP have agreed to acquire Abano Healthcare for an enterprise valuation of around NZ$300 million ($190 million). They will buy all outstanding shares in the New Zealand-listed company for NZ$5.70 per share through a scheme of arrangement. The bid, which has been endorsed by the Abano board, gives the company an equity valuation of NZ$150 million and factors in the assumption of a NZ$150 million in debt load. The implied 2019 EBITDA multiple is 8.9x.

The price represents a 63% premium to Abano’s June 28 closing price, the last day of trading before the company disclosed it had received provisional offers, according to a filing. The stock ended November 11 up 19% at NZ$5.45.

Abano claims to be one of the largest dental groups in the trans-Tasman region. The company has 123 practices in New Zealand, where it operates under the Lumino brand, and claims a 17% share of a market worth NZ$900 million. The Australia market is far larger and Abano’s Maven brand has a much smaller presence: 116 practices and less than 2% of national revenue base of NZ$10.8 billion. The company is said to have struggled to execute its M&A strategy there. 

Abano has previously expressed a desire to triple its business in Australia over the next decade. It is estimated that the top five or six companies, including market leader BUPA, control only 10% of the market between them. Despite concerted consolidation efforts in recent years, the industry is dominated by more than 7,000 single clinic operators. 

OTPP went through a similar evolution with Heartland, turning a business with 375 affiliated dental practices in 21 states into the largest dental support organization in the US. At the time of the sale to KKR, Heartland’s footprint covered 840 practices across 35 states with a workforce of 11,000. Revenue was around $1.3 billion in 2017, representing an increase of 126% over five years.

The pension fund’s direct investment team worked alongside BGH during due diligence, with the professionals that oversaw Heartland having some input as well. A key contribution was helping BGH understand the potential for the business by drawing on the experiences of Heartland.

“There are three ways of growing these businesses. One is organically by improving the existing sites and OTPP had some input on that. A second is acquisitions, which Heartland certainly did, so there were things to learn in terms of approaching and structuring deals and retaining dentists. And thirdly, there are greenfield strategies. In that respect, OTPP helped frame up the scale of the opportunity,” the source says.

Abano acquired practices in 16 locations during the 2019 financial year, which drove revenue to NZ$338.9 million, up from NZ$312.7 million for the previous 12 months. However, net profit narrowed from NZ$12.6 million to NZ$7.6 million, while EBITDA fell from NZ$34.5 million to NZ$32.7 million. This was blamed on deteriorating economic conditions in Australia and investment in IT, people and systems infrastructure required to support growth.

BGH closed its debut fund at A$2.6 billion ($2 billion) last year and has now completed or agreed three transactions. The others are the A$2.1 billion privatization of education services provider Navitas, in which OTPP participated as one of several co-investors, and a roll-up of 12 cybersecurity companies. The firm also made a small investment in Healthscope as part of its privatization bid for the company and sold it when Brookfield Asset Management ultimately prevailed in that process.

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• Topics
• Australasia
• Buyouts
• Healthcare
• LPs
• Australia
• New Zealand
• BGH Capital
• OTPP