KKR’s Heartland Dental sits on the M&A sidelines

KKR-backed Heartland Dental, the most important sponsor-backed dental service group within the U.S., will not “carry on shopping for simply to purchase” as scaled dental M&A exercise cools, says CEO Pat Bauer.

Why it issues: Tough financing markets and labor prices have put strain on the doctor follow administration deal panorama, and Bauer’s feedback substantiate market chatter that almost all $1 billion-plus PPM offers stay on ice.

What he is saying: It is going to be powerful for any platform to get new capital for the following eight months or so, Bauer predicts: “All people is on maintain for bigger acquisitions.”

  • The pipeline of solo practitioner acquisitions stays strong (Heartland is on observe to do 120 single-practice acquisitions this 12 months).
  • With inflation, rising wages, and an incapacity to extend charges, “the PPOs are simply crushing the solo practitioner,” he says.

Sure, and: Heartland, which Bauer says will surpass $3 billion in income, goals for 100 de novos this 12 months.

  • It’s going to goal 150 and 200 de novos in 2023 and 2024, respectively, he provides — giving it an incredible progress runway even with out large M&A.

Catch up quick: KKR and Heartland in July invested in a newly mixed Canadian DSO created by way of the merger of Peloton Capital Administration’s 123Dentist, Sentinel Capital’s Altima Dental and Lapointe Groupe.

  • Monetary phrases weren’t disclosed, however Bauer says Heartland injected $50 million into what’s now the second largest dental platform in Canada after L Catterton’s DentalCorp.

Sure, however: Why not simply purchase 123Dentist? “It was too costly,” Bauer says.

  • Heartland by way of the strategic partnership helps 123Dentist with buying energy and programs operations, positioning it for one more potential transaction alternative down the highway.
  • “In some unspecified time in the future, it is likely to be a greater time to have a wedding, however right now wasn’t the day.”
  • DSOs north of the border have higher EBITDA margins, he notes, because of stronger same-store gross sales progress and the dearth of lab charges.
  • That is maybe mirrored by diverging deal multiples: A single follow acquisition goes for some 8x-plus EBITDA in Canada, versus 4.5x EBITDA within the U.S., the CEO says.

State of play: Like different specialties, labor is the most important ache level in dental proper now, the CEO says.

  • Hygienists and dentists are graduating at an about 1:1 ratio whereas the ratio is nearer to 2:1 within the dental workplace right now, he says. “For those who can’t recruit and maintain medical doctors… it’s an enormous downside.”

Between the strains: Heartland sits beneath KKR’s core investments technique, whose capital is geared at longer-term alternatives — that means KKR shouldn’t be speeding towards a liquidity occasion, Bauer says.

  • In distinction, Bauer expects some friends might be struggling: “They’re rising lengthy within the tooth [for their investors].”

What’s subsequent: As massive strategics starting from UnitedHealth’s Optum to Amazon to CVS go after main care, Bauer says it isn’t that loopy to assume that some “wild card consumers” finally flip to dental.

  • “Let’s be sincere: the mouth is the gateway to the physique,” Bauer says. “Each insurer is aware of that if they will seize folks at their enamel and get them wholesome, they will save a bunch of cash on the medical aspect.”
  • Heartland has been approached by massive strategics concerned about testing out a dental mannequin, he says, however these conversations have but to maneuver ahead. Bauer declined to call these events.

Of observe: Walmart has already dabbled in dental by way of its well being clinics, charging a flat charge of $50 per checkup.

The intrigue: As dental platforms like Heartland, DentalCorp and Aspen Dental maintain getting greater, the logical purchaser pool shrinks. If an IPO is not the top sport, perhaps this “wild card” situation is not so wild in spite of everything.