Sentinel Checks Out From Dentist –

It may be everybody’s secret fantasy to be able to go to work on their dentist. Sentinel Capital Partners did just that. In as little time as it takes to spit and rinse, the private equity firm bought, recapped, merged and exited Castle Dental Centers Inc. in a $56 million transaction that closed last week. The Houston-based dental-services provider was merged with Bright Now! Dental Inc., a Santa Ana, Calif.-based owner and provider of business support to more than 200 dental offices in 18 states.

Sentinel Founder and Managing Partner David Lobel said that Sentinel’s sale of its 60% stake in Castle came far earlier than was originally expected. The prematurity of the deal was not a result of poor company health. Rather, it was the culmination of “numerous suitors knocking at the door” only six month after the firm’s acquisition of Castle, Lobel said.

“When we first acquired Castle in May 2003 we thought to ourselves that we would be in the company for three, four or five years, and had an exit plan drawn up accordingly. But then buyers in the same market came knocking, saying, If you don’t sell to us, you will be competing with us’,” Lobel said. By selling, “We were able to avoid a grind-out of people beating each other’s brains out over shared-market interests, and they [Bright Now!] were able to eliminate their competition. It was a win-win situation.”

Sentinel was all smiles, walking away from the Castle with more than 2.2x its investment and an IRR of 189% after a 13 month holding period. In February of this year, the firm led a partial refinancing of the company, enabling it to recoup $7 million of its cost.

When Sentinel took control of Castle, the dental services provider was “way over-leveraged,” Lobel said. Founded in 1981 as local dental provider in Houston, Castle soon gained national recognition. With the help of Bank of America, AmSouth Bank, GE Capital Corp. and Fleet Bank, Castle opened offices by the bundle in Florida, Texas, Tennessee and California, “while generating a massive amount of red ink,” Lobel added. Today, the company has 73 locations.

By 2002, Castle was $50 million in debt with only $5 million of EBITDA, Sentinel Principal Paul Murphy said. Shares of the company were trading at between one cent and two cents. Sentinel was able to cut a deal with the banks, buying Castle’s debt for 42 cents on the dollar. “Over the years they’ve [Castle] been able to fix a lot of problems and integrate units across the country. But the one thing they couldn’t fix was the balance sheet,” Murphy said. “And that’s a problem we could fix.”

Lobel said that when Castle merged with Bright Now!, their shares were trading at just under 16 cents each.

Sentinel’s growth strategy for the company was based on organic growth; opening new centers in key areas that were doing well and closing them where business was bad. Lobel said there was no time for the firm to devote toward add-ons.

“The Dental industry is a good industry. People are living longer and trying to keep their teeth longer. The population increase and popularity of cosmetic dentistry are making it an even more desirable marketplace to be in,” said Lobel. “These factors were a help to us and will help the buyers for years to come.”

Snapshot

Seller: Sentinel Capital Partners

Target: Castle Dental Centers Inc.

Buyer: Bright Now! Dental Inc.

Purchase Price: $56M