Dental market remains strong in 2019 despite challenges

Christie & Co’s Business Outlook 2019 report predicted the dental market would become increasingly quality driven throughout the year and expected competition for larger practices would continue among private equity backed groups and mini corporates, driving market consolidation. Christie & Co also predicted corporates would divest non core practices as a result of increasing costs. 

In the first half of the year, the shift towards the private sector has continued, as corporate and multiple practice owners seek to counterbalance risk associated with the forthcoming contract reforms and mitigate the net reduction in NHS funding. Although Christie & Co notes there has not been any reduction in demand from first time buyers and independent operators for single site NHS or mixed income practices, demand for fully private practices, whether general or specialist, is anticipated to grow significantly over the coming months as we approach April 2020.

As predicted, the market has simultaneously become increasingly quality driven and geographically sensitive, as ongoing challenges related to associate recruitment and retention drive demand towards urban locations. However, NHS dentistry is still considered highly attractive for many entering the sector and independent buyers, who are less sensitive to recruitment challenges, as they will be an owner-principal and directly involved in the performance of the NHS contract. 

While the market remains highly fragmented, continued market consolidation has signalled towards the emergence of a ‘mid-market,’ as companies such as Dentex, Dental Partners and Perfect Smile move towards, and in some instances surpass, the 50 site mark. Christie & Co estimates that there are now in excess of 400 practice owners with 2+ sites in the UK, which marks a 50% increase on the number of multiple practice owners from 2015.

Private equity interest and investment continue to encourage the growth of multiple operators, and small and mid cap private equity has turned towards smaller platform opportunities to gain a foothold in the dental market, as well as some larger investors. There have been a number of notable deals, including G Square Capital’s investment in Dental Care Group and Apposite Capital’s investment in Riverdale and subsequent acquisition of Alpha Vitality. 

The challenge for new entrants and existing operators alike will be the supply of suitably large practices coming to the market. Whilst Christie & Co estimates that some 800 – 900 practices are offered for sale every year, only a minority of these are suitable for larger companies. Demand continues to outstrip supply, which is a significant factor in price inflation, and whilst average prices have increased across the dental sector, larger practices of high quality have recorded the greatest rates of increase in line with demand. 

As the costs of running practices increases, a tranche of smaller practices run by corporate providers have become less economic to run due mainly to their larger central costs. Typical in other business sectors where the divestment of non core businesses is commonplace, the trend is beginning to manifest in the dental sector, with a number of corporate clients selling smaller practices back into the independent sector.

 

Brexit

Brexit presents challenges within the sector in terms of recruitment and retention, given EEA qualified dentists represent the second largest part of the UK dentist workforce. Following a decline in the number of EEA registered dentists for three consecutive years from 2014 to 2016, the number finally stabilised in 2017 despite a reduction in new registrations from the EEA, with the total number of EEA dentists remaining flat around 6,800. Areas further away from main population centres will be most affected by the declining number of EEA and overseas qualified dentists.

 

Key transactions

The dental sector continues to be one of the most active in which Christie & Co operates, as the dental team reports encouraging levels of activity across the UK.

In March, Christie & Co sold Metamorphosis Dental, one of the UK’s largest and most successful private orthodontic practices, in Fulham, South West London to Bupa Dental Care. Metamorphosis Orthodontics generated significant interest from a number of prospective buyers, reinforcing the current demand for fully private dental businesses. 

This was followed by the landmark sales of two small groups in quick succession. Total Dental Care, a group of four practices in London and the South East was sold to Bupa Dental Care and the Houston Group, one of the longest established premium independent groups in the UK was sold to Alliance Dental Care. Both sales are examples of the demand for prime dental businesses and attracted multiple offers from a range of dental companies and financial buyers.

Simon Hughes, Managing Director – Medical at Christie & Co comments, “Despite the ongoing challenges of associate recruitment, particularly in the NHS sector, and an uncertain political climate, the dental sector continues to perform very well with significant transactional activity across all price ranges.”

Chris Vowles, Head of Valuation Services – Medical at Christie & Co comments, “With an unabated appetite from all lending institutions, the dental market remains buoyant, which is helping drive the continued demand from potential operators from both an acquisition and refinance prospective. With the continued emergence of private equity platforms and demand, prices achieved will continue to grow.”

Christie & Co has recently published its Dental Market Review 2019, which provides detailed insight into current trends and transactions in the sector.