Abano cops shareholder flak over low-priced offer

Abano Healthcare's dental unit owns the Lumino dentists chain but immigration delays mean it is taking longer for overseas dentists to start work.

Abano Healthcare chair Pip Dunphy has rejected suggestions that former activist investors Peter Hutson and James Reeves were correct in their criticsm of the business as shareholders prepare to vote on yet another takeover bid.

A number of shareholders attending today's annual meeting in Auckland were clearly disappointed by the latest takeover offer, this time one that the board is supporting.

Australia-based private equity firm, BGH Capital and the Ontario Teachers' Pension Plan Board are offering $5.70 per share, valuing Abano at $149.8 million, through a scheme of arrangement.

Abano shares were recently trading at $5.40, down more than 24 per cent from a year ago and well below the $9.84 a share partial offer from Hutson and Reeves that was rejected in 2017.

Dunphy told the meeting the difference between the current offer price and the late 2016 valuation by Grant Samuel of $9.92-11.93 per share includes the fact that the Lumino business hasn't grown as fast as expected and its ebitda margin has dropped and the underperformance of the Maven business.

Part of Maven's under-performance reflected vendor dentists in Australia retiring sooner than in New Zealand and that Abano had found it challenging to replace them with senior experienced dentists who were capable of performing at the same level, Dunphy said.

As well, competition for dental practices in Australia had pushed prices to levels where Abano's board was concerned that further acquisitions would destroy value, she said.

Abano chair Pip Dunphy

The Grant Samuel valuation was produced in response to a bid priced at $9.84 per share for 38 per cent of the shares that would have taken the bidder, a company owned by former direct Hutson, his wife Anya and Reeves, to owning 51 per cent.

Hutson and Reeves had been lobbying for change at Abano for several years, having first supported an informal takeover bid by Archer Capital at $6.97 a share in 2013.

Their plan had been to change the company's strategy by halting acquisitions in the medium term to reduce debt and improve the existing dental practice's operations.

Last week Hutson told the Herald that while he took less of an interest in Abano related matters these days, his view had not changed.

"Clearly we were happy to own it at that time at $10. However, we could see the problems in the company and it seems that things have deteriorated since then, and they find themselves in this situation.

"We did the analysis then and it showed the patterns that were going to lead to this result.
I think there's been some pretty massive destruction of shareholder value over a period of time. I don't think shareholders should be happy about it."

Abano has since decided to halt acquistions in Australia but now appeared poised to be taken over by private equity interests.

Hutson said shareholders deserved better answers as to what went wrong.

Peter Hutson (L) and James Reeves. Photo/Sarah Ivey

"Yes they have a right to seek an explanation. Value destruction here has not just been in share price. The substantial proceeds of sale from several subsidiary companies have also effectively been flushed."

Dunphy said valuation multiples for dental practices have also fallen so that even if Abano had been able to maintain earnings, the value of the business would still have fallen about 16 percent, or $2 per share.

She confirmed that shareholders at the sparsely attended meeting did not include representatives from the largest shareholders Harbour Asset Management, ACC or Forsyth Barr.

On Friday, Forsyth Barr advised NZX that its stake in Abano had dropped to 8.3 percent from 9.4 percent as a result of sales between Aug. 15 and Nov. 21 at prices between $4.54 and $4.98 per share.

Abano had succeeded in fending off five previous takeover attempts, including three by Hutson and Reeves, and former chair Trevor Janes, who stepped down from the board after the meeting, was asked why Abano had attracted so many suitors.

Janes said the Ontario Teachers' Pension Plan had already had a positive experience of investing in corporate dental companies in the United States and that it saw a similar growth opportunity in Abano.

However, that growth "requires significantly more capital that we're likely to raise at a reasonable price," Janes said.

Trevor Janes, former Abano chairman

Outlook mixed

Abano Healthcare's operating profit in the year to date was slightly ahead of the prior year with New Zealand sales marginally higher but Australian revenue continues to decline, according to chief executive Richard Keys.

Earnings before interest, tax, depreciation and amortisation, and before the impact of the new lease accounting standard, were $14.4 million for the five months ended October, the dental practice aggregator told shareholders at today's annual meeting.

Lumino, the New Zealand dental business, has a strong local and international recruitment pipeline but immigration delays mean it is taking longer for overseas dentists to start work, Keys said.

Sales through Lumino practices owned for 12 months or more were up 0.8 percent while sales through the Australian Maven practices were down 1.9 percent, although that was an improvement from the 2.9 percent decline in the year ended May.

"The restructuring of the support offices and other cost initiatives are also delivering savings. Capital expenditure remains below budget with no significant projects planned for this year," Keys said.

However, the first-half results, expected to be released in late January, about a month later than usual, will include the costs of conducting the competitive bidding process that led to the takeover offer Abano's board is supporting.

With BusinessDesk