A review of the dental sector as we enter 2019
Simon Hughes, managing director at Christie & Co Medical summarises dental activity in 2018
Demand remains strong across the value range and for all practice types, although there has been a flight to quality for many buyers in 2018 and a shift in demand towards the private sector. This has been driven by two main factors – firstly by the challenges that many NHS operators face in recruiting and retaining associate dentists and secondly, the focus on growth which the private sector affords.
The lack of supply of quality dental practices continued throughout 2018, which has underpinned prices, particularly in the higher price ranges. Over recent years, the growth in the number of smaller dental companies has increased demand for larger practices, where greater economies of scale can be realised. Multiple practice owners are increasingly developing specialist treatments in house as a means of retaining ‘referral’ income.
NHS dentistry is still considered highly attractive for many entering the sector, although there is now greater sensitivity in relation to UDA performance than in recent years.
Banks continue to demonstrate good appetite for dentistry and the low level of impairment over the last 10 years confirms the industry is a relatively safe haven for investment with excellent returns.
Corporate activity and market consolidation
The dental sector continues to consolidate, although with only an estimated 12% of practices in corporate ownership, the market remains highly fragmented.
Multiple operators remain very active with several seeking private equity investment as a means of accelerating expansion over the coming years. This has been further encouraged by ‘marquee’ investments, such as Jacobs Holding’s acquisition of Southern Dental, now re-branded Colosseum, CBPE’s investment in Rodericks Dental and more recently, Core Equity Holding’s acquisition of Portman Dental Care.
The sector enjoys huge interest from private equity investors, although deal volumes are hampered by suitable ‘platform’ opportunities and a lack of quality management teams. To mitigate the lack of supply, we are seeing a number of smaller investment houses targeting large, single practices.
As the market matures in the UK, larger companies might begin to explore expansion opportunities in European countries with a sound economic landscape, population wealth and good oral health. Jacobs Holding is the first to own multiple portfolios under separate brands on a pan-European basis and could encourage UK dental companies to do likewise.
As covered in our recent market report, ‘The Dental Industry 2018: Staffing Brexit and The Dentist Shortage,’ operators are increasingly concerned about the availability of specialist skilled workers. The private pay market continues to attract new associates, especially new associates looking to evade the UDA system and enhance earnings. The growing market and subsequent lack of associates will continue to place upward pressure on pay scales.
Urbanicity will increasingly contribute to a surplus of dentists in urban settings, whilst worsening the shortage of dentists in rural areas. Pay rates are likely to increase in rural settings throughout the next year in an attempt to draw more dentists to these areas. However, some recruitment issues are beginning to enter more urban settings, as well.
Most importantly, operators will need to accommodate emerging workforce trends to attract associates, for example through providing flexibility by condensing working hours into a shorter work week. Many dentists are also choosing to work across multiple practices to increase their patient pool and achieve higher rates further from home once or twice a week.
Gross income and UDA contract performance are directly attributable to every member of the clinical team. Maximising the skills of hygienists and therapists within a practice could allow for associates to focus on the performance of more advanced dentistry, driving income. More training places for therapists, hygienists and undergraduate students should be prioritised. However, there is a cost associated with the recruitment and training of therapists and hygienists, a proportion of the workforce which is also in short supply.
Brexit is inextricably linked to recruitment and retention in the dental workforce, presenting a real challenge for many operators. The number of EEA registered dentists fell for three consecutive years from 2014 to 2016, finally stabilising in 2017 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. The deal agreed could stabilise the number of dentists leaving the UK, but more importantly, the Government should aim to welcome skilled dentists and immigration barriers should be reduced for dentists who qualified outside of the EEA to attract more dentists to the UK workforce.
In November, Christie & Co brokered the sale of Caledonian Dental Care, Scotland’s largest dental practice, comprising two large practices with a total of 19 surgeries, in Perth, Scotland. Established in 1947 with the second practice purpose built in 2009, the practices are two of the busiest general dental practices in Scotland, with approximately 40,000 registered patients. Sold in excess of the asking price following a confidential marketing process to key operators in the UK dental market, Caledonian Dental Care was acquired by Portman Dental Care, marking their sixth acquisition in Scotland.
A One Dental, a highly profitable mixed income practice in Bradford, West Yorkshire was sold to an expanding regional operator through Christie & Co in November, with funding secured through Christie Finance. The practice benefits from an NHS contract with an exceptionally high UDA rate and was sold off a guide price of £1,150,000 for the leasehold interest.
In July, Christie & Co sold Brooklands Dental Clinic, a high quality, private general practice in Broughton, Milton Keynes. The practice was acquired by Enamel Dental, a newly formed dental company, marking the group’s third practice.