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Backed by three private equity firms, dental clinic chain 123Dentist is joining forces with Altima Dental to launch a national company that can rival industry leader Dentalcorp Holdings Ltd. DNTL-T

Vancouver-based 123Dentist was set to announce on Tuesday that it will merge with Toronto-based Altima and its Quebec division, Lapointe Group, to create a network with 350 clinics, as an increasing number of dentists opt to build their practices as part of a large chain.

Private equity fund Peloton Capital Management, an existing investor in 123Dentist, and New York-based KKR & Co. Inc. are financing the transaction and have partnered with Heartland Dental, a U.S. dental support company owned by KKR, and New York-based Sentinel Capital Partners, which is Altima’s financial backer. Toronto-based Peloton and KKR will be the controlling shareholders.

123Dentist, founded in 1993, and Altima did not release financial terms of the transaction. However, after the merger, 123Dentist will be 70 per cent of the size of publicly traded dentalcorp, which has an enterprise value – its equity plus its debt – of $3.2-billion. This implies 123Dentist is valued at approximately $2.2-billion.

Dentalcorp, based in Toronto, is the largest company in a consolidating sector, with about 500 clinics. Since its founding in 2011, dentalcorp has expanded the number of clinics in its network at a 32-per-cent annual clip. Three private equity funds supported dentalcorp’s growth: L Catterton of Greenwich, Conn., and Imperial Capital Group Ltd. and the private equity arm of pension plan OPTrust, both headquartered in Toronto.

Private equity firms have been on a tear consolidating businesses in health-professional fields, targeting industries such as dental care, veterinary medicine and pharmacies. Practitioners tend to get back-office support from the chains, as well as help with marketing and other services, while the acquiring chains get businesses with steady streams of revenue.

However, acquisitions have become so common that purchase prices have reached frothy levels. In some cases, practices are purchased for nearly 30 times their earnings before interest, taxes, depreciation and amortization.

123Dentist co-founder and chief executive Amin Shivji, who still sees his own patients, said he and the dentists and denturists who founded Altima and Lapointe have discussed combining forces frequently over the past eight years. Serious merger negotiations began six months ago, driven by expectations of rising growth, and a need to ensure patients and dentists received the best possible service, including low prices from suppliers.

Dr. Shivji also said that since the beginning of the pandemic, dentists have put increasing value on being part of a “stable, solid” company, and this shift in mindset is persisting because of current economic uncertainties, including labour shortages.

Typically, professionals working at 123Dentist retain a 20-per-cent stake in their business, and look to the parent company for support on accounting and billing, hiring and purchasing supplies and equipment.

Dentistry is an $18-billion business in this country, and only 6 per cent of about 15,000 dental practices in Canada are part of chains such as 123Dentist and dentalcorp.

Peloton managing partner Steve Faraone said private equity funds are investing in health care providers such as 123Dentist based on stable long-term growth trends and increasing acceptance of a corporate model for what used to be owner-operated businesses. When Peloton first invested in 123Dentist in 2019, the chain had 70 clinics; it has grown fivefold over three years.

Peloton, chaired and backed by financial services entrepreneur Stephen Smith, has investments in five different health care services sectors, including veterinary clinics, fertility clinics and rehabilitation centres.

123Dentist used RBC Capital Markets as financial adviser on the transaction, along with law firms Torys LLP and Miller Thomson LLP. Altima hired New York-based investment bank Houlihan Lokey and law firms Stikeman Elliott LLP and Kirkland & Ellis LLP.

With a report from Chris Hannay

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