Palamon Capital Partners buying out IDH Group

The news broke this week that Palamon Capital Partners (PCP)–www.palamon.com–together with the current Management team are to buy out The Carlyle Group’s (TCG) share of the IDH Group, now trading as MyDental, in a rumoured £700m+ deal. This would make it the biggest Dental equity buy in the UK’s history. (Source: Sky News)

This development has its origins over a decade ago and the financial crash of 2008. A the time, IDH had about 350 practices–mostly NHS–and was majority owned by Merrill Lynch, a New York Stock Exchange-independent company. At the same time Associated Dental Practices (ADP) were majority owned by Kaupthing Singer Freidlander (KSF), an Icelandic private equity company.

As the financial crisis developed, Merrill Lynch were taken over by the Bank of America, who then ran a plan to repatriate overseas investments and therefore put IDH group on the market. Iceland was hit heavily by the crisis, with KSF quickly falling into liquidation which in turn resulted in ADP being put up for sale at roughly the same time as IDH.

Enter Palamon Capital Partners and The Carlyle Group. Both made highly leveraged (i.e borrowed a lot of money) offers to purchase ADP and IDH respectively and soon after decided to merge the two companies under a joint ownership scheme, where Carlyle would own c. 75%, PCP 20%, and Management 5%. Thus by 2011 the companies were trading as a single entity known as the IDH Group.

 In the following years some notable things happened;

  1. Performance, measured by UDA delivery tanked partly caused by the distraction and issues of merging two very large operating dental groups;
  2. Senior Operational Management were swapped in and out regularly;
  3. Deteriorating performance meant that bank debt drawdown for the planned massive expansion of purchasing more practices was curtailed;
  4. The Group instead invested heavily into buying up Dental Support Services companies, most notably the Dental Directory in a process called “horizontal integration”;
  5. Bank Funding for the group, with it’s no doubt many restrictive covenants was replaced by c.£560m worth of Corporate Bonds;
  6. Group rebranding from IDH/ADP to MyDentist began, together with a move towards more investment and attention to Private Revenues (Fee per item).

How much of the overall woe was caused by integrating and constantly changing senior operational teams, but also the ownership teams and their no doubt slightly different priorities, we’ll never fully understand, however by 2017 a Management Team led by Current CEO Tom Riall was installed and they put in place a turnaround plan.

 The PCP/TCG bed always looks to have been slightly uneasy, with the first real public rumblings of disagreement on exit strategy coming in2015/6 when the IDH group was touted for an Initial Placement Offer (IPO) on the UK stock market. The history of Private Equity businesses with their traditionally short sighted views has never sat easy with the long term views of Pension Funds etc who invest in IPO’s for long term stability (think Southern Cross care homes or more recently Debenhams). When it looks like they were advised that the IPO would not generate the desired returns the IDH Group was out to market but again did not attract sufficient interest to convince both ADP and TCG to sell.

Over the period 2015-2020 periodically ‘noises’ came out of further IPO’s or Market Sales coming to nothing. The resignation of PCP members of the The IDH Holdings Board signalled the growing apparent fall out between the two majority shareholders, which brings us to today.

 At the time of the merger back in 2010 PCP had a clause built into the agreement giving them the option to buy The Carlyle Group’s shares if they matched an open ‘other’ offer and The Carlyle Group wished to accept it. This effectively what was announced last week.

 For TCG one senses that after 10 years ownership whether they achieved their original objectives or not it was just simply time to get out. For PCP one senses that as the junior financial partner in the scheme things may not have gone as they would have wished but they were restricted from doing things their way. Now they see the chance that maybe they can.

 So why would they choose to exercise their buy in option. Presumably they feel comfortable with the progress of the Turnaround plan and the Management Team now in place and they will have reassessed the current UK Dental opportunities, which are markedly different from 10 years ago.

 It only makes sense for PCP to roll the dice again if they are convinced that they can grow the business, so what are the growth opportunities?

Firstly there is the NHS delivery performance improvement to complete, at one time their UDA contract delivery performance at the company level was down to just over 80%. Subsequently some contracts were surrendered. They must believe that post CoVid they can move back to the accepted norm of c. 96%; 

Secondly as we emerge from CoVid costs on PPE and issues like fallow time will enhance from current profitability levels;

They seem to be greatly encouraged by their development of Private Sales. The Pluto Partners view of the market is that Private Practices are now deemed more ‘valuable’ than NHS ones. If MyDentist can convert a large base of NHS practices into strong mixed/private ones then their sale value may well increase. This may have implications for Private Practices located near to MyDentist NHS ones;

The only sizeable corporate buying NHS practices over the last few years has been Rodericks, so Pluto Partners believes there is a massive NHS practice buying opportunity for MyDentist to increase their portfolio size with it’s traditional subsequent arbitrage and operational synergy gains to follow;

As the investment in the rebrand continues a future IPO maybe more favourably received by the Market, additionally pan-European dental groups are on the rise and any foreign owners (European, US or Far East)looking to enter the UK market with a company that has strong macro-economic defences (i.e the NHS contracts) and will probably be prepared to pay a premium price for that.

We at Pluto Partners know that the market for Private Practices remains very ‘hot’, we suspect it will soon reheat for NHS practices. If you want discuss any of these issues or opportunities further then give Max a call on 0800 086 2315 or email at info@plutopartners.co.uk.

The views expressed in this blog are of the Pluto Partners only and may have no bearing on the realities of the parties above mentioned. For transparency we declare that the Operational Directors of the Pluto Partners have worked for both ADP and IDH.

 

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