18 June 2021

Greencross Business for Sale?

Greencross’s Owner, private equity firm TPG, is reported to be appointing investment bankers to advise on options. This is code for getting ready to sell either by IPO or by trade sale to a bigger buyer. The market is ripe for TPG to exit. Covid 19 has been a boon for vets with an explosive increase in the number of dogs purchased as pets. Country mixed animal practices have also experienced a resurgence as drought conditions in much of Australia have dissipated with good rains and grazing conditions.

End of the Road for Smiles Inclusive aka Totally Smiles:  Big Lessons for New Dental Corporates IPOs

On the recommendation of the administrators of dental corporate Smiles Inclusive Ltd, owners of branded practice chain Totally Smiles, creditors have voted in favour of liquidating both companies. Realistically there was no alternative to winding up this sorry mess. The administrators estimate gross proceeds of a mere $9.2 million from practice sales, including the sale of 16 practices to Genesis Capital and 21 practices to individual purchasers—which is a puny overall price for 37 practices. This reflects the damage which has been wrought during the relatively short reign of Smiles Inclusive Ltd, which almost from the very beginning lurched from crisis to crisis. This left 12 dental practices that remained closed due to lack of interest from buyers. Since the administration process began, 169 out of 235 employees have either lost their jobs or have resigned. With some new hirings, it is estimated that 92 staff members have been or will be transferred to Genesis. The net proceeds of the liquidation are shared between administration costs and secured creditors who get about 15 to 16 cents in the dollar. Unsecured creditors get nothing. 

With strong hints of legal class actions, and Smiles’ true financial situation uncertain, none of the bigger players in the dental corporate field were prepared to take over the company. Nor would the condition of many of Smile’s practices have appealed. 

At the time of Smiles’ IPO in 2018 I indicated that the first reliable indication of Smiles’ performance would be in its financials for the first half of 2019 Financial Year, which would be in about April 2019 for companies with a 30 June balance date or a full year guide for financial year to 30 June 2019 anticipated by no later than early October 2019. 

It transpired that Smiles shares issued at $1.00 were worth only 13.5 cents by 1 March 2019.  2019 Financial Year was a disaster. Smiles had racked up losses of $5 million in its short trading period prior to 30 June 2018. It lost $31 million in FY 2019 and $13 million in the first half of FY 2020, the last set of proper financial completed. As I had predicted, Smiles failed—but did so at a faster rate than expected.

During its short life, there were a number of demands for extraordinary general meetings, Smiles had three CEOs, and various board changes. Various capital raisings and sales of a couple of the better practices delayed collapse, but eventually the inability to produce current audited financials meant that the ASX would not lift its suspension from trading, nor could a further capital raising occur. Its last official price on the ASX was 3.1 cents per share but as its shares were suspended from trading for much of its short life even that price became illusory.

Those who put together Smiles’ IPO and those broking advisers who promoted it to their clients, its directors and CEOs should hang their heads in shame.

What does Smiles Failure Mean for Dental Corporates?

For those corporates with an established history as listed businesses there will be little or no impact.

For those yet to be listed dental companies hoping to have an IPO and listing, it may be of significant concern and at the very least affect sentiment toward them resulting in tighter prospectus pricing. It has long been the case that corporate consolidation of professional practices including accounting, dental, dental laboratories, medical specialist, and medical general practices have proved to be a great deal riskier than promoters have indicated with a substantial number of failures. I will not be subscribing to a dental IPO.

When Will National Dental Care IPO? 

National Dental care was reported by the Australian Financial Review of 15 March 2021 as preparing for an IPO and ASX listing but nothing more has been heard. It would be attracted toward getting a float away in a buoyant stock market but perhaps faces a dilemma in that the collapse of Smiles Inclusive Ltd would have made some potential investors wary of dental IPOs which are a good deal riskier than the brokers who promoted the Smiles Inclusive IPO believed.

The PE ratio suggested as pricing parameters for a National Dental Care IPO were difficult to comprehend given the history of difficulty in consolidating groups of professional practices and their various business failings.

A previously scheduled National Dental Care IPO in 2018 was withdrawn at the last moment reportedly over accounting queries related to a group of WA dental practices. 

Hot Market for Veterinary Practices  

Recently corporate buyers including some lesser corporates have been offering previously unknown earnings multiples for sound veterinary practices. Inevitably this will not last. There are already clear signs of long-term interest rates increasing. If, as seems likely, this trend continues then the multiples relating to stock market listed businesses will reduce with a flow on impact on prices paid for practices

General Advice

This newsletter contains general advice. Readers must do their own research and source additional advice and brokers’ reports as necessary. Those with advisers should do additional research of their own and become familiar with investing fundamentals before simply following advice.

I sold my interest in a financial services and accounting group on 30 June 2020 and have no intention of starting another financial services business. I own, via my family superannuation fund and investment portfolio, some of the stocks mentioned in this newsletter. Those who find my newsletters of value to them are asked to consider making a donation to the Delany Foundation, a registered charity which assists schools in Papua New Guinea, Ghana and Kenya. Delany Foundation c/- Holy Cross College, 517 Victoria Road Ryde NSW 2112.

Best wishes to all 

Graham Middleton