Smiles Inclusive asset buyer Genesis makes $223m bid for Pacific Smiles

Almost a year since Pacific Smiles (ASX: PSQ) co-founder and substantial shareholder Dr Alex Abrahams failed an attempt to overhaul the board, today the dental group is in the crosshairs of a suitor that outbid him to pick up the remaining assets of collapsed dental roll-up Smiles Inclusive.

In 2021 Dr Abrahams, who holds a 12.58 per cent stake in Pacific Smiles, hoped to snap up Smiles Inclusive's remaining Totally Smiles-branded dental clinics from administration but lost out to Genesis Capital.

Now that same company has made a $233 million non-binding takeover proposal for Sydney-headquartered Pacific Smiles, in a move the target's board has described as 'opportunistically timed' given a share price slump.

Genesis has made the offer at $1.40 per share, representing a 17 per cent premium to Friday's closing price. The market has responded positively with shares rising above the offer price to $1.42 per share, marking a return to levels seen in September before they deteriorated over the last few months.

The suitor is also considering options to allow Pacific Smiles shareholders the opportunity to roll their shares into unlisted equity.

From a starting point of nine clinics acquired from Smiles Inclusive, Genesis has been growing its portfolio in the space including the relaunch of Bounce Dentistry, the addition of Sale Street Dental in Orange, and the merger in October last year between Totally Smiles and About Smiles.

This merger, controlled by Genesis, led to the creation of Impression Dental Group which has been led by former Smiles Inclusive chief operating officer (COO) Mark O'Brien.

Impression has also acquired Tooth Booth Dentists in south-east Queensland, Darling Dental in Tamworth, Coolum Beach Dental on the Sunshine Coast, and QV Dental in the Melbourne CBD. 

Despite its statement that the offer is opportunistic, the Pacific Smiles board has vowed to assess the merits of the proposal 'relative to continuing to capitalise on our existing network, brand and current trading momentum, and further leveraging our organic growth capability and strong balance sheet position'.

"There is no certainty the indicative proposal will result in a transaction on the proposed terms or at all. Pacific Smiles shareholders do not need to take any action at this time in response to the indicative proposal," Pacific Smiles states.

In FY23 Pacific Smiles recorded a 19.5 per cent lift in patient fees to $270.5 million from its 130 dental centres and eight affiliated with health insurer HBF, which has around 10 per cent of shares on issue, just behind Dr Abrahams and slightly ahead of co-founder Alison Hughes with 9.9 per cent.

Pacific Smiles has more than 900 dentists engaging its services and has 545 chairs at its Pacific Smiles centres, in addition to 60 chairs in HBF dental centres. The group's long-term target is to have 250 centres and 800 chairs, with a 15 per cent EBITDA margin compared to the current level of 8.9 per cent.

"The number of new dental centres was deliberately moderated over the past year following the accelerated rate of expansion undertaken in prior years, with those centre cohorts being bedded down and generating continued improvements in performance," said interim CEO Paul Robertson at the Pacific Smiles annual general meeting (AGM) on 22 November.

"Pacific Smiles is targeting the opening of up to 5 new centres in the second half of FY24, subject to trading conditions. Site selection is undergoing detailed and stringent review relative to the current economic climate and its impacts on some demographics," Robertson said.

"Practitioners continue to choose Pacific Smiles in pleasing numbers, reflecting the attractive and flexible offering that our organisation affords."

Robertson has been filling the cavity left by the departure in August of former CEO Phil McKenzie, who Dr Abrahams had tried to kick out much earlier at an extraordinary general meeting on 19 December 2022.