No Images? Click here January 2019 The stockmarket is warning that the good days for veterinary and dental corporate roll ups may be over Rollup market on the nose The professional practice rollup market is now on the nose with further significant examples in the veterinary profession also. For example Greencross Ltd is only down 9.9% for the year to 10 December 2018 but had been much lower (12 month low of $3.58 compared to a high of $6.56) until it was rescued by two separate private equity suitors offering to take it over. Synstrat has regularly received reports from a variety of competing vets on the poor condition of many of the Greencross practices and it’s likely that a private equity buyer will separate out its Petbarn business and attempt to sell off its freestanding veterinary practices. Many of those practices are nowhere near as good as they were when originally purchased. The impact of withdrawing a generation of experienced practice owning vets in a short time and leaving practices to be run by inexperienced and part time vets without the leadership of an experienced veterinarian or experienced partners is proving destructive. National Veterinary Care Ltd’s share price was down by 25.22% in the year to 10th December 2018 so there’s not much solace there and we also note in passing that Apiam Animal Health was down 43.67% in the same period. Smiles Inclusive had its IPO and listing with initial acquisition of 52 practices. It announced to brokers and fund managers that those practices contained 61 totally unused chairs which it expected to be able to fill with patients. Discerning observers realised that these chairs once had patients and the current absence might be a pointer to the type of practices that Smiles Inclusive was purchasing. When it released its first quarter of 2019 cash flow statement the market sold down its shares. Subsequently when the Australian Financial Review ran a story about its dispute with the co-owner of its school mobile dental facilities the share price fell lower. Its share price which had a high of $1.18 hit a low of 30 cents on 13 December 2018; ouch! Corporate dentistry – a bubble bursting! Corporate dentistry was showing signs that the take up of practices was far from easy. National Dental Care had to pull its proposed initial public offering and stockmarket listing when it realised that a few weeks from the proposed IPO date that a group of 17 practices it had purchased in Western Australia were underperforming. This amounted to an admission of senior management failure. Having pulled the IPO and listing it may be a couple of years before it can tidy up its act and persuade brokers that it has something to offer the public. Peter Hughes, formerly associated with Ekera Medical Ltd was in the market for dental practices in his company Kikada Lane Pty Ltd. He may have found that there were slim pickings in the market. It’s often the case that a would be corporate runs around trying to get enough practices interested into its yard without actually paying any money out because it needs a critical mass to be able to obtain finance from banking backers. The difficulty is that sometimes the practices that have been herded into the pen wander out again while the would-be entrepreneur is searching for more practices to round up. We expressed serious doubts about the proposal being put to dentists of a partial buyout with dentists maintaining some equity. It seems to us that when it comes to eventual sell out of the remainder by the dentist there is only one buyer who can set the price. Corporate penetration The number of dental practices controlled by the corporates is nowhere near what was anticipated ten years ago. Indeed the first dental mover 1300 Smiles Ltd’s acquisitions have slowed, probably because of others in the market and a desire to stay profitable rather than be drawn into the vortex of paying too much for underperformed practices. Corporate dentistry in Australia is unlikely to reach a level of some overseas countries. Too many Australians have an independent mind and many dentists take pride in the fact that they are running a good practice without corporate or health fund interference and at distance from government schemes. The old adage that it’s best not to have third parties involved in practices is as true as ever. Other corporate failures The widespread corporate troubles in professional practices are reminiscent of the failure of the accounting rollups of Harts Australasia Ltd, Stockford Accounting Ltd and Knights Insolvency Ltd about 20 years ago, each of which ended in liquidation. 50 to 100 suburban accounting practices rolled into a group don’t substitute for an international accounting group type practice which in reality is a different type of business doing the audits of major listed companies and providing an array of consultancy services. A dental laboratories business Pearl Healthcare Ltd never traded at its IPO price and had a dismal time as a sharemarket listed company before it eventually disappeared into liquidation. Its IPO subscription was 25 cents per share and at the end of day one on the stockmarket it was worth 19 cents per share and never traded at that height again before eventually falling into liquidation. A collection of small businesses don’t make a big business. Hundreds or more of small miners and prospectors don’t add up to the massive operation of Rio Tinto or BHP Billiton in the Pilbara. The same can be said for the medical world. For example I am aware of a rollup of high fee earning orthopaedic surgeons which was intended to get to the market but fell apart as unforeseen difficulties caused the surgeons to become disillusioned and warn their colleagues not to join. There was also the sad case of Foundation Healthcare Ltd. There are numerous other medical examples. The lesson Joining together a substantial number of a particular type of professional practice or a collection of small businesses often does not provide a viable large business. Further examples occur in the franchising industry where a huge number of franchise outlets are part of a sea of trouble of struggling overworked franchisees and underpaid staff. The second lesson Once individual practices are removed from the direct control and influence of experienced owner operators of the profession concerned they can deteriorate rapidly. High Risk Corporate rollups of professional practices have proven to be high risk and any stockbrokers or corporate advisory groups thinking otherwise need to concern themselves with the risk that they will inflict on their clients if they propose that they invest in them. Obviously these thoughts will be uppermost in the minds of those who might be contemplating an IPO or listing for the Vet Partners business or other dental rollups as one of their options. In the latter case potential investors would look at the trajectory of Smiles Inclusive Ltd’s share price since its IPO being the most recently listed dental corporate. The rollups have removed a generation of veterinary and dental practice owners from a large number of practices in a relatively short period and it is extremely difficult to pick up the pieces with far less experienced practitioners who are not practice owners involved in running the practices. Corporatised professional practices - high risk investments Huge numbers of failures and mediocre performances among the corporate rollups of the veterinary, accounting, medical, dental and dental laboratory practices are far too many to ignore and point to the repeated failures of corporate management to achieve the same level of practice performance as which formerly existed in a multitude of practices under private ownership. Corporate advisers, sharebrokers, analysts and investors have been subjected to many losses and must consider further corporate rollups as being high risk investments. Across the private veterinary practices in Australia, rarely would a week pass without a privately owned vet practice owner or owners telling me about the significant number of new clients they are getting as a result of staffing and other problems in a nearby corporatised practice. Best wishes and a very Happy New Year to all Veterinarians, Graham Middleton The Synstrat Group are Australia's most experienced Veterinary practice business advisers, accountants, practice valuers and licensed financial advisers. The information contained herein is of a general nature and no specific action should be taken without individual advice. Synstrat Management Pty Ltd P. 03 9843 7777 ABN 57 006 295 325 If you are not the intended recipient of this communication please delete and destroy all copies of this message and telephone Synstrat on +61 3 9843 7777 immediately. 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