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Henry Scheins Investment in Small Brazilian Dental Distributor Signals Strategic Expansion Into South America

Henry Scheins Investment in Small Brazilian Dental Distributor Signals Strategic Expansion Into South America

On Wednesday morning, Henry Schein announced a 50% ownership stake in Dental Speed Graph, the largest direct marketing provider of dental consumables in Brazil. Though little financial detail was given, we know the revenue contribution is a fairly modest $28 million that is reportedly growing quickly. Though the financial impact is expected to be very modest in 2014, we believe this is the first move in a broader strategy to expand in South America, and Brazil in particular.

We view Brazil as a large, fast-growing market for dental care, with a growing middle class, high propensity for cosmetic procedures, and relatively few established distribution players at the moment. Thus, we believe this is a potentially large opportunity for Schein to roll up market share both through acquisition and organically through its value-added service model. Given the size of the acquisition, we are maintaining our 2014 EPS estimate of $5.37 (up 9%) and our 2015 EPS target of $5.91 (up 10%). Though valuation for Henry Schein is high by historical standards, we maintain our Outperform rating on the stock given the defensive nature of Schein s end-markets and the company s track record of excellent execution.

Other than the revenue contribution of $28 million, relatively few transaction details were announced. Given the size of the deal and that the company has rights to only 50% of the earnings (the remaining 50% is owned by the founder, who will be staying on as a managing director), we do not believe the company will generate material earnings in 2014. We note that typically, management pays between 30% and 50% of revenue for acquisitions, which suggests a price between $8 million and $14 million. Given a revenue growth trajectory in the double digits, we would not be surprised if the price was toward the higher end of that range. No margin detail was given, but we know that this is a mail order/online order business, where Henry Schein also has its roots. Over time, we expect Henry Schein to apply its value-added full service business model, which should help improve margins.

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Market Detail. Though relatively little detail exists, it is estimated that the Brazilian market is growing in the 5%-10% range, well above the low-single-digit rates seen in other developed markets. Dental Speed is growing at roughly two times this rate, albeit from a small base. We believe the market is fragmented with over 150,000 dentists (compared with the company s 55,000 customers) and relatively few large players. We believe Henry Schein will be able to roll up market share both through acquisition and organically as it applies its value-added full service business model and robust sales and service platform. Thus, we view this acquisition as an important platform in the ongoing international strategy despite the small deal size.

Henry Scheins Investment in Small Brazilian Dental Distributor Signals Strategic Expansion Into South America

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