Pacific Smiles, the pearly whites for two Private Equity groups

Two private equity firms, Genesis Capital and Crescent Capital Partners, are battling it out to add ASX-listed dental clinic group, Pacific Smiles Group, to their portfolios. It’s been a messy battle, with efforts including a significant share purchase to block the other group's offer, which was countered with a report to the Australian Takeover Panel.

Who knew a dental clinic takeover could be so juicy?

Here’s the story:

Lay Of The Land

Pacific Smiles Group (PSG) operates 128 centres across Australia and is the last of its kind on the ASX. The aging population is expected to provide growth opportunities in the dental services industry over the coming years, and Pacific Smiles expects to capture a significant portion of that.

The industry is highly fragmented, with the main resistance to consolidation being the ability to provide an attractive enough business model to dentists. PSG has overcome this resistance through a model where dentists pay a monthly service fee, calculated as a percentage of patient fees.

For the first few years, a new dental centre will lose money, taking, on average, about three years for a new center to start generating profits. The benefit for a dentist to join PSG is that they aren’t exposed to this loss-making period, have less time to ramp up patient numbers due to branding, and enjoy the benefits of utilising available capacity within PSG’s network. The downside is that they forego building equity in their own centre.

PSG has made a significant investment in its future growth potential over the past few years, with 34 new centers opening since FY20. This is currently weighing down their profitability but provides plenty of opportunities for growth.

Enter two private equity groups.

Since late 2023, Genesis Capital and Crescent Capital have been competing to take the company private. With both already holding dental clinic networks in their portfolios—Genesis Capital with Impression Dental Group and Crescent Capital with National Dental Care—it has been quite an aggressive bidding war.

Economic Interest

It started in December 2023 when Genesis Capital disclosed that they had acquired an “economic interest” in Pacific Smiles—basically claiming they stood to make money if the share price went up, but they didn’t have the other benefits that come with owning the shares, i.e., voting rights.

They then put forward a proposal, in the same month, to acquire PSG for $223 million, which was deemed “strategically opportunistic” and was rejected. Genesis revised their offer and submitted a proposal to acquire the company at a valuation of $279 million on March 19, 2024. A few weeks later, Crescent Capital entered the process and submitted a $303 million bid.

This is where it starts getting interesting.

On May 7, Genesis gave notice that their original agreement had been amended to “provide for physical settlement”—it’s no longer just an economic interest but they will actually own the shares and the voting rights that come with them. The same day, they exercised the agreement and now own 19.9 percent of the company.

This play has been run before by Genesis’s advisor, Jarden, who advised TPG through a similar 20 percent ownership-turn-$1.8 billion takeover of InvoCare.

In an effort to save their bid, Crescent submitted an application to the Australian Takeover Panel stating that there was deficient disclosure and requested that Genesis:

• Must not vote any Pacific Smiles shares in which they have a relevant interest against the Crescent bid, or

• Genesis must divest the relevant shares.

The Panel found that there was deficient disclosure; however, they would not be penalised.

Why is this ownership such a big deal?

Deal Blocker

For either scheme to pass, it requires 75 percent approval from the votes cast and more than 50 percent of Pacific Smiles’ investors by number voting. Over the weekend, Genesis indicated they would be voting against Crescent’s proposal, which leaves little work to be done in order to block the deal.

On the other hand, Genesis is looking to appeal to shareholders’ interests in retaining exposure to the potential future growth of PSG by offering them shares in lieu of cash.

The company's share price has jumped significantly since the bidding war kicked off and currently sits at $1.84 per share. This is a 5 percent premium to Genesis’s offer, which indicates that the market either thinks Crescent will garner the required 75 percent support or Genesis will increase their offer to get it across the line.

Thanks for reading,

Archie Sampson, Founder of Prepped