Tuesday, November 6, 2012

OTPP Sinks Teeth Into Private Equity?

Soyoung Kim of Reuters reports, Ontario Teachers acquires control of Heartland Dental:
Ontario Teachers' Pension Plan said on Monday it has agreed to take control of Heartland Dental Care Inc in a deal that values the U.S. dental practice management firm at about $1.3 billion, according to a person familiar with the matter.

Ontario Teachers, one of Canada's largest pension funds, is buying a majority stake in Heartland, while founder and Chief Executive Rick Workman will retain a minority stake along with management and employees, the two companies said in a statement.

Effingham, Illinois-based Heartland manages more than 375 affiliated dental practices in 21 U.S. states, providing dentists with administrative services such as personnel staffing, purchasing, and financial, marketing and technology support.

Ontario Teachers outbid private equity firms KKR & Co, Apax Partners and Madison Dearborn Partners, which had also pursued a buyout of Heartland and submitted final bids on October 22, the person familiar with the matter said.

Ontario Teachers did not disclose terms of the transaction, but the deal values Heartland at roughly 11 times the company's annual earnings before interest, tax, depreciation and amortization of around $120 million, according to the source.

"Having Teachers' as a partner will provide us with a stable platform to continue to grow by providing support services to other dental offices," Heartland CEO Workman said in a statement.

Heartland was advised by investment banks Jefferies and Moelis on the transaction.
Cristina Alesci, Jeffrey McCracken and Doug Alexander of Bloomberg also reported on the deal, Ontario Teachers’ Agrees to Buy Stake in Heartland Dental:
Ontario Teachers’ Pension Plan, Canada’s third-largest pension fund, agreed to buy a majority stake in Heartland Dental Care Inc. for an undisclosed price.

Heartland Dental Care founder Richard Workman will retain a “significant” minority stake together with management and employees, according to a statement today by the Effingham, Illinois-based dental service company. The deal values the company at about $1.3 billion, according to people with knowledge of the matter.

“Our investment in Heartland Dental Care is supported by favorable fundamentals and demographics,” Jane Rowe, senior vice-president of Teachers’ Private Capital, said in the statement. “We have been impressed with their dedication to providing high-quality support services to dental practices that reduce the administrative burdens on dentists.”

The Toronto-based pension fund manager outbid traditional buyout funds run by KKR & Co. (KKR), Madison Dearborn Partners LLC, and Apax Partners LLP, which had also pursued an acquisition of Heartland, said one of the people, who spoke on condition of anonymity because the talks are private. Heartland offers leadership training and support services to more than 500 dentists in 21 states, according to today’s statement, making it one of the largest U.S. dental practice management companies.

Calls to Ashley Buehnerkemper, of closely held Heartland, weren’t immediately returned. Representatives of the private- equity firms declined to comment.
Teachers’ Investments

CHS Capital, a Chicago-based private equity firm, bought a stake of undisclosed size in Heartland in 2008.

In addition to investing in private-equity funds managed by others, Teachers’, with C$117.1 billion under management as of Dec. 31, makes its own direct investments in private equity, usually alongside a buyout firm. Teachers’ has disclosed only two acquisitions worth more than $1 billion without a co- investor, according to data compiled by Bloomberg.

Those were the 2007 acquisition of marine container terminals in Canada and the U.S. from Oriental Overseas International Ltd. for about $2.35 billion, and the 2000 purchase of Cadillac Fairview Corp., a commercial real estate developer, for C$2.3 billion ($1.56 billion at the time).

Jefferies Group Inc. and Moelis & Co. are advising Heartland.
Kudos to Jane Rowe and her team at Teachers' for striking this deal, outbidding traditional private equity funds who were also interested in buying a majority stake in Heartland Dental Care. partnering up with the company's management also ensures alignment of interest.

As I stated in my comment a couple of days ago on PE having a hard time defending itself, large Canadian pension funds have the internal expertise and governance model to engage in direct deals and co-invest alongside private equity funds, foregoing or lowering fees significantly and having more control over these investments. Moreover, pension funds have a longer investment horizon than PE funds, which works in their favor when they engage in direct investments.

Even though the exact amount wasn't disclosed, the deal values Heartland Dental Care at roughly 11 times EBITDA of around $120 million, a fair valuation for one of the largest US dental practice management companies. The fact that Teachers' felt confident enough to go direct instead of partnering up with a fund says a lot about Teachers' Private Capital. Direct deals that exceed $1 billion are rare, especially quality deals like this one, supported by "favorable fundamentals and demographics."

Those of you who cannot invest in private equity but are interested in this space, there is a publicly traded company called Birner Dental Management Services Inc. (BDMS) but it's not liquid (hardly trades). You can, however, invest in Sirona Dental Systems (SIRO), a company which manufactures, and markets dental equipment for dentists worldwide (be warned, stock has surged in last three months) or its competitor, DENTSPLY International Inc. (XRAY).

What other sectors are supported by fundamentals and demographics? Over the weekend, looked at companies that operate senior living residences in the United States. Companies like Brookdale Senior Living Inc. (BKD), Sunrise Senior Living Inc. (SRZ), Assisted Living Concepts Inc.(ALC), and Five Star Quality Care Inc. (FVE). Again, don't buy any of these companies without doing your due diligence.

Another sector that is in full growth mode is laser eye surgery. A couple of years ago, I went to Lasik MD to correct my myopia and kissed my glasses and contact lenses goodbye. That was one of the best health investments I ever made. My buddy, a radiologist, also did this procedure and still raves about it (Teachers' should buy a stake in this company).

Finally, on the topic of dental, I recently went to clean my teeth and it set me back $140. Some of my friends pay more, $160 to $200 a cleaning. Dentists tell you to visit them twice a year but it's a huge racket. The best investment you can make for your teeth is to buy an Oral-B electric toothbrush (the basic $40 one is fine, don't buy the $200 scam), take your vitamin D and floss every single day.

Below, Kevin Nee, President of Wilshire Private Markets, interviews Jane Rowe, Senior Vice President of Ontario Teachers' Private Capital (from SuperReturn US 2012 conference).