Pan-European dentistry is here, but at what price?
The first truly pan-European dentistry giant with clinics in around ten countries could soon be a reality after years of gradual bottom-up consolidation. A huge fragmented market remains to be conquered – but operators and investors tell us that prices are coming unstuck from reality.
This month, Tandvitaal, a dentistry-chain with clinics in Holland, Germany, Belgium and Italy, will go under sale. The auction is likely to attract private equity firms with substantial dentistry platforms already under their belt including BC Partners and Hesira. Tandvitaal would give either of those investors a truly pan-European platform. Should Jacobs Holding-backed Colosseum Smile secure the deal, it would add them onto a chain that’s already in Sweden, Norway, Switzerland, the UK and Italy.
Under the radar, the consolidation of the fragmented dentistry market has been going on for many years. The small practice model that has dominated the industry since inception is coming under pressure from chains that offer lower prices and a wider range of services to customers and less administrative burden for dentists, said KPMG in a recent report. Aging dentists are selling out to chains and being replaced by a new generation that never wanted to start its own business in the first place. Succession is now a major issue for small practices right across Northern Europe.
On the other side, private equity firms are being tempted by the sheer size of the roughly-€70bn European dentistry market left to be consolidated. KPMG puts the market share held by chains between 35% in Finland and less than one 1% in Switzerland. The largest markets in Germany and France remain almost totally unconsolidated, thanks to regulations. That means that large chains still rarely come up for sale, attract plenty of bidders and strategic investors are usually priced out. In the last two years, KPMG says seven of eight large acquisitions have been PE-backed.
In the one deal that wasn’t, the British insurer Bupa bought the Oasis Healthcare chain for £835m and a historic EBITDA multiple we believe came in at around 15.5. An individual practice in the UK would normally go for six times EBITDA or less. This year the Nordic chain Colosseum Smile was bought by Jacobs for a price we’re told could be as much as 14 times. The Dutch press says Tandvitaal will be valued at similar levels and we hear that individual practices would also fetch less than six times in the Netherlands.
KPMG says the opportunity for these investors comes from both the size of the market and the synergies a large and potentially multinational operator can achieve. Centralising back-office functions like IT, finance and marketing cuts overheads and there are also efficiencies to be made in the procurement of disposables, instruments and equipment. Many chains open their own shared service centres and labs and invest in technology like 3D-printing. Chains also find it easier to recruit dentists, ensure service continuity and share work between clinics.
Bud van der Schrier, director at KPMG, and one of the report’s authors, told us the economies of scale make this an interesting opportunity for consolidators. “If you look at the dentistry value chain, on the side of the large equipment manufacturers it’s very concentrated. The buying power as you go downstream diminishes until you get to local mum’n’pop shops that are paying top-dollar for instruments, technical work and everything. The industry is also very fragmented, the demand dynamics are relatively predictable, there’s extreme room for buy and build and some value to be generated from efficiencies. For private equity, fundamentally, it’s a relatively safe bet.”
European dentistry markets by size of the total and consolidated market by Billion US$ of customer spend in 2015. Sourced from The Dental Chain Opportunity, KPMG, 2017.
That view was not shared by everyone, however. Michel Cohen, CEO of DentalPro, the largest chain in Italy and now owned by BC Partners, told us the worth of many of these synergies is overplayed. Consumables, for example, only make up about 10% of the cost base for most practices. Exclude implants, and it can be less than five. “Cut costs by 5% and you might gain half a point on your P&L,” he said. “But procurement is simply not enough to justify a large transaction as there’s simply not enough meat on the bone.”
You might also ask whether being international is worth it. Van der Schrier says the main driver is that there aren’t enough targets of a decent size in single countries for private equity to simply roll it up, so they have to expand other countries. And yet, some of the largest groups like Oasis, the Swedish co-op Praktikerjanst and the UK’s mydentist are more or less national plays.
Cohen, for example, claims DentalPro has doubled its volume just in Italy over the last few years. In procurement, he says it’s difficult enough to convince dentists to use new equipment from the same country let alone buying internationally. Some groups are said to be importing lower-paid dentists from countries that have surpluses. In the UK that might work, but our sources say the language barrier as well as regulation make that very difficult to do elsewhere and it’s largely a bottom-up process driven by individuals anyway.
Then there are dangers of moving management further away from the customer. In Spain, Vitaldent, one of the largest chains lost as much as 30% of its sales when allegations of tax fraud were levelled against its director, just as it was about to go under auction. Another went into administration, and the industry as a whole has seen its reputation suffer in the country.
This is partly down to the franchise business model of Vitaldent, Funnydent and Dentix, for example. But van der Schrier says there is a danger in dentistry, like healthcare in general, of a breakdown in the consumer-specialist relationship. Chains generally have high employee churn damaging the stable relationship people want to have with their dentist. When dentists leave they also often take their patients with them.
Finally, there’s a level of variation within the dentistry market which makes it difficult to build large chains. The acquisition of Tandvitaal by someone like Hesira, for example, would be difficult because of the differences in their Italian businesses. One is offering highly commercial dentistry out of large practices in shopping malls, while another is a more suburban group. Across the continent, there’s huge variation in pricing, size of practices and the use of unified brands.
“If you start having a playing with a mix of different brands, strategies and development patterns then it’s very difficult to size the opportunity and to know whether you’re paying the right price,” says Cohen.
Largest dentistry providers in Europe calculated using the HBI Top 1,500 European Operators Database.
There is a huge opportunity for consolidation in European dentistry. It’s a market of €70bn in sales across Europe and low levels of consolidation even by healthcare’s standards. Regulatory barriers have come down. In Germany, a US$28bn market, providers must still own a hospital to get a license – but this is no longer holding people back says van der Schrier. He’d put money on there being multiple large chains in the country in five years’ time.
The corporatisation of dentistry is also not going into reverse, and nor should it according to KPMG, which claims its benefits stretch right from the patient to payors and even regulators. The fact that the insurer Bupa has bought a chain is also suggestive of the value it offers to payors.
In emerging markets, development banks like the IFC have taken stakes in dentistry chains. You might argue that the connection between dental health and overall health is now better understood and perhaps considered too important to be left to mum’n’pop shops.
Still, we heard skepticism about the prices that are being paid and the level of uncertainty in the market. The first European dentistry IPO has yet to happen so it’s a mystery how the public markets would value a dentistry group; the transparency a public company would bring is also lacking. Truly gauging how much is being exchanged in the current market is also difficult. One source claims Oasis could have gone for anything between 13-18X and Colosseum anywhere between 12-14X.
“These multiple indeed seem high,” says van der Schrier, “there is a lot of value to add by consolidation, but only the future will tell whether the expected growth will be realized.”We would welcome your thoughts on this story. Email your views to David Farbrother or call 0207 183 3779.