Abano Healthcare's admission this week that its Australian acquisition strategy has essentially been a failure is a major blow for shareholders and raises tough questions over past statements made by the company's board.
News that Abano has now halted its purchases of dental practises across the Tasman was delivered on Tuesday along with a 12.6 per cent profit guidance downgrade. As the share price sank 30 per cent to less than $4.40 - wiping $35m of the company's market value - investor concern turned on whether their dividend was safe.
More on that shortly. But first we need to address the elephant in the room.
Abano said it is pausing its acquisitions in Australia to focus on organic growth. Therefore the company "does not see a need to raise capital in the foreseeable future."
So Abano is now doing exactly what former shareholders Peter Hutson and James Reeves advocated for when they sought control of the dental clinic first in 2013 and then again in 2016.
What's happened to the Australian side of the business since is exactly what they predicted. But Abano's board - led by former chairman Trevor Janes - remained stubbornly defiant when batting away the takeover proposals, which they described as unwelcome, unsolicited and "well below fair value."
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.
The pair tried to oust Janes as chairman but their resolution was resoundingly voted down at a special meeting. Three years later they tried again, this time being prepared to pay $9.84 a share for a 50.01 per cent shareholding. Again they were unsuccessful with independent valuer Grant Samuel valuing Abano shares at $9.95-11.96 each.
"We have had concerns about Abano's performance for a number of years," Hutson and Reeves wrote in their takeover offer document lodged by their company Healthcare Partners.
Boeing back-flip: Company now 'humbled' by 737 Max crisis
Watchdog warns Slingshot over 'misleading' discount internet offer
They said Abano had acquired dental practices over the previous five years which had an average EBITDA margin of 28.5%. Over the same period, the average EBITDA margin for all dental practices owned by the company has been only 11.8%.
At the same time, Abano's net debt position more than tripled from the start of 2012 to 2016.
They went on to say that if their bid was successful they would change the company's strategy by halting acquisitions in the medium term to reduce debt and improve the existing dental practice's operations.
In response on December 14 2016 Abano's board said they unanimously recommended that shareholders reject the partial takeover offer.
"Abano has an established and proven strategy and a track record of delivering earnings growth and shareholder value," the directors said.
"Healthcare Partners' offer is being made at a time when the value and benefits of Abano's investment into its dental group are just beginning to be realised."
However the forecasts Abano put out to their shareholders at the time have never been met.
In the two years since the last Hutson/Reeves bid, Abano has raised money from shareholders, sold remaining non dental assets and continued aggressively to acquire businesses with the view the company could drive scale and generate improved margins as a result.
But clearly that strategy has failed.
The subsequent reset of the business strategy takes the business back to square one and is the right move to make.
But there will by some disappointed and frustrated shareholders.
"I think there will be investors who will regret not having the opportunity to take that offer, but it was a hostile offer and it was recommended against by the board," says Stephen Ridgewell, an analyst at Craigs Investment Partners.
"Given they haven't delivered on their strategy, it may have been a better option for shareholders, particularly where it's trading at the moment," he said.
The problems in Australia have been visible for some time and Abano needed to raise equity to continue expanding. But with the share price less than half what Hutson and Reeves were offering two years ago, it would have been a tough sell to shareholders.
Ridgewell says the situation raises some questions over Abano's future dividend policy.
"Abano currently pays out 70 per cent of earnings as a dividend. Net debt to EBITDA is about 4 times, which is quite high gearing. So if the focus returns to paying back debt organically then it's not necessarily a guarantee that the dividend policy would be maintained at current levels."
It's also interesting to note Abano has begun a strategic review.
Hopefully it doesn't find any more cavities.