German dentistry consolidation set to take off
A gold rush for the €17.1bn German dentistry market is beginning with a new consolidation platform set to launch. All the pieces are now in place, experts say, to build big profitable businesses in Europe’s largest and most fragmented market.
“We saw labs begin consolidating about ten years and a couple of groups have been working on ophthalmics for five years, and radiology for about two years, dentistry is the next logical step,” says Boris Bernstein, an executive advisor for the investor Waterstreet, who has been following the dental space for some time.
Ben Faircloth, partner at L.E.K. Consulting, agrees that the eyes of the large private equity-backed groups that are building chains across Europe are turning towards Germany. “It’s very early days,” he says, “but it’s the one everybody has their eye on next.”
There are a couple of players that are at the starting line, says Bernstein, who are likely to focus regionally building up clusters. This includes Zahnaertzliche Tageskliniken and Zahnstation as well as Curaeos the pan-European platform recently purchased by Swedish private equity firm EQT. We have also been told a new platform is finalising the purchase of a small hospital that will grant it an MVZ (outpatient medical service provider) license as we speak.
There are more than 70,000 dentists in Germany of which 50,000 are practicing. Three-quarters of those are in single practice. By comparison, there are 9,000 in the Netherlands and 30,000 in the UK. There are also more dentists per population in Germany with 85 per 100,000 versus 64 in the UK and 52 in the Netherlands.
Dentistry makes sense as a corporate business because, like labs and imaging, it’s capital and material intense, creating scale effects. Yet, the biggest factor in favour of chains is probably the use of labour. Material costs, for example, are typically below 10%. The Dentistry Association, however, calculated that in Germany dentists spend around 45% of their time doing admin. “Chains can take all of that away from them,” says Bernstein.
But these factors are nothing new, so why has consolidation taken off now?
That’s partly because Germany’s dentists are ageing with the average age tip-toing upwards every year and now above 50 for men. Many opt for a gradual retreat from private practice towards retirement that takes-in a period working for a chain. They can still serve their old patients, but have more security and spend less money on consumables and capital assets and less time on administration.
“The issue for older dentists is that oddly nobody wants to buy their practices because the younger dentists coming out of medical school want to work more flexibly,” says Bernstein.
“It’s also an increasingly female workforce,” adds Faircloth. “Research suggests that young dentists, and female dentists of all ages, are attracted by some of the more flexible working practices that corporate platforms can offer.”
A change to the regulations has also helped. Direct ownership of the 80% or so MVZs that were not purchased by investors other than hospitals or physicians before 2010, is limited to doctors, hospitals, not-for profits or providers of dialysis. Until 2015, MVZs also had to offer more than one medical specialism under their roof.
The government has now changed the latter and people are increasingly finding ways around the former. “The change is important,” says Bernstein, “as before you would have had to have an anesthesiologist within the MVZ for example. But you only had to have one MVZ and the rest could be single specialism branches, so it wasn’t insurmountable.”
“It’s a relatively conservative profession so to encourage people to sell you have to have a good concept and a well-respected dentist to face colleagues and industry associations,” says Bernstein. Dentists have to stay in the practice for at least three years for tax reasons and some of the platforms are combining that rule with an earn-out and an optional profit or equity share.
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