What Does Q & M Dental Group (Singapore) Limited’s Latest Acquisition Mean for Its Shareholders?

After having requested for a trading halt yesterday, dental services provider Q & M Dental Group (Singapore) Limited (SGX: QC7) announced earlier today that it has entered into an agreement to acquire all the shares of TP Dental Surgeons Pte. Ltd. for a total sum of S$28.6 million.

The deal

TP Dental Surgeons, founded in 1973, “is one of Singapore’s largest and most established dental surgeries”. The company’s clinic is located in Ngee Ann City Tower and the firm is actually owned by five shareholders with Dr. Hwang Yee Cheau, who’s also the key dentist in charge, being the largest owner with a 51% stake.

The deal will see Q & M Dental pay a total of S$18 million in cash to all five shareholders of TP Dental Surgeons. In addition, Q & M Dental will be issuing S$10.6 million worth of its shares, at S$0.70668 each, to Dr. Hwang as part of the payment terms.

The agreement also comes with multi-year service contracts for TP Dental Surgeons’ five shareholders (10 years for Dr. Hwang and 5 years for the other four shareholders) with Q & M Dental.

On top of the service agreemet, Dr. Hwang has also agreed to provide a profit target of S$4 million every two years for a total of eight years starting from the completion of the acquisition. If the profit target is not met in any of the two-year blocks, Dr. Hwang will sign a one year extension to the service contract.

What this means for Q & M Dental Group

In the year ended 31 December 2013, TP Dental Surgeons had net tangible assets of S$1.9 million and revenue of S$12.4 million.

According to Q & M Dental’s number crunching for the pro forma effects of the acquisition, the firm will see its net tangible assets per share for 2014 rise from 5.31 cents per share to 6.55 cents; meanwhile, earnings would jump by 16.6% from 1.51 cents per share to 1.76 cents per share.

Investors of Q & M Dental might want to note the increase in the firm’s share count as a result of the acquisition: Roughly 15 million shares, which is 1.93% of Q & M’s current share count of 788.6 million shares, are expected to be issued to Dr. Hwang.

Foolish Summary

The acquisition agreement for the deal can give us a good sense of the business of a dental practice.

Most of the value of such a business comes from the healthcare professionals that are working within. That is why the TP Dental Surgeons deal had multi-year service contracts for all its existing shareholders.

The key for Q & M Dental now is to to reduce TP Dental Surgeons’ reliance on its existing shareholders before the service contracts expire. By doing so, Q & M Dental can help ensure the long-term success of its latest acquisition.

Q & M Dental has lifted its trading halt since 11:15 am today.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any of the companies mentioned above.