The red-hot market for buying professional health practices has begun to cool.
Large consolidators, many backed by international private equity funds, had been snapping up the clinics of veterinarians, dentists and others in recent years as part of an accelerating drive to roll up the fragmented markets and extract profits.
The corporate buying spree had seen the purchase prices of clinics skyrocket over the past few years. That resulted in a big payday for the independent sellers, but also made it difficult for young professionals to buy their own clinics because they couldn’t compete with the large players that had much deeper pockets.
But those working in the industries say the seller’s market has cooled dramatically this fall, in part because of rising interest rates.
Most of the consolidators in Canada are privately held, but a few are public. The largest is Dentalcorp Holdings Ltd., which has driven double-digit annual revenue growth through an aggressive acquisition agenda. Dentalcorp DNTL-T, which has 538 locations, bought 42 clinics in the first quarter of this year, 28 in the second quarter and 14 in the third quarter.
The company said in its third-quarter report, released Nov. 9, that it was taking its foot off the gas for the rest of this year and next to focus on deleveraging. It had $1-billion of senior debt in its most recent report, of which half had a fixed interest rate of 6.6 per cent and the other half a floating rate. The company’s ratio of net debt (total debt, minus cash) to EBITDA (earnings before interest, taxes, depreciation and amortization) was 7.2 to 1, according to S&P Global Market Intelligence. Dentalcorp uses a measure called “PF adjusted EBITDA” and arrives at higher profits, calculating its ratio at 4.3 to 1.
When asked by analysts about the impact of rising interest rates, Dentalcorp executives say it is a bigger problem for the independent professionals they compete against when buying clinics.
“Interest rates are going up, their mortgages are going up, their student debt is going up, and that availability of capital is obviously coming down” for independent dentists, Nate Tchaplia, Dentalcorp chief financial officer, said at a TD Securities conference on Tuesday.
Those working on the ground say buyers’ constrained budgets from rising rates and higher expenses because of inflation are leading to lower prices and less buying activity.
Timothy Brown, chief executive officer for ROI Corp., a brokerage for dental, veterinary and optometry practices, said listings are staying on the market longer than they were earlier this year.
He said exceptional dental practices might have attracted 10 to 15 offers in the spring, but they are now getting three to five offers instead. “That is a sign of a slowing market but not a declining market as of yet,” he said.
Douglas Jack, a lawyer at Borden Ladner Gervais who specializes in working with veterinarians, said veterinary consolidators have dramatically slowed their buying in the past two months, with some stopping altogether.
He said practices that were attracting offers of 15 to 20 times EBITDA a year ago are now getting offers of seven to 10 times EBITDA, and more of those offers are being made with payment partly through stock in the parent company.
With offers coming in at lower values, many professionals thinking of selling their practices may hold off longer to see if the market rebounds, which could result in more of a near-term slowdown.
“I think it’s going to be a two-way approach, where buyers are going to want lower valuations to go ahead and do the deal, and sellers are maybe not going to be satisfied with that,” said Alan Ulsifer, CEO of Calgary-based optometry network FYidoctors.
Sina Amiri, a dental industry consultant and vice-president of revenue for Zentist, said the furious pace of acquisitions in the past few years by big corporate players was a land grab, and much of the low-hanging fruit – the clinics with doctors most eager to sell – has now been picked.
“Now you’re getting into the harder stuff,” Mr. Amiri said. “The harder-to-get transactions just move more slowly, and those guys and gals have more options. They may not necessarily need to sell today.”
He said he expects more consolidators to turn to buying each other in the months and years ahead – a movement that may already be under way. Rivals 123Dentist and Altima Dental merged in July with the backing of private equity firms and U.S. giant Heartland Dental, and Dentalcorp announced Monday it was beginning a strategic review process in response to unsolicited offers.
For those independent health care professionals who own a practice and are thinking of selling, those in the industry say it may be a while – if ever – when purchase prices return to the heights seen earlier this year.
“There’s a lot of people who have missed the boat and are kicking themselves,” Mr. Jack said.