Buckley Capital's Zack Buckley on why he's urging $DNTL.TO to undertake a strategic review process

Episode Summary

Executive Summary: The episode examines DentalCorp (DNTL), a Canadian dental-practice roll-up seen as a high-quality, defensive, cash-generative business that the market has persistently undervalued. Guest Zach Buckley argues the stock’s discount stems mainly from leverage, Canada-listing bias, and a failed 2022 sale process—not business quality—and that a sale or rerating could unlock substantial upside.

Main Topics: DentalCorp’s business model and growth profile (Priority: 5/5): DentalCorp owns and consolidates Canadian dental practices, benefiting from organic same-practice growth, acquisitions, and future margin expansion as prior corporate investments normalize. Valuation gap and activist-style public letter (Priority: 5/5): Buckley explains why he published an open letter: to push for faster value realization, potentially via a private sale, because the public market has not recognized intrinsic value for 18 months. Failed strategic alternatives process (Priority: 5/5): The company had two takeover offers in 2022, but the process stalled when credit markets tightened during the banking crisis, not because of company-specific due diligence concerns. Capital allocation and leverage debate (Priority: 4/5): The discussion centers on why DentalCorp prioritizes debt paydown and practice acquisitions over buybacks, with Buckley arguing lower leverage should eventually support a rerating. Industry structure and acquisition economics (Priority: 4/5): Canadian dentistry is highly fragmented, sticky, and attractive to private equity; DentalCorp can buy practices at attractive multiples and extract operating synergies without relying on a U.S.-style reimbursement system. Management changes and governance simplification (Priority: 3/5): Recent leadership and structural changes—including Nate becoming president and removal of multi-voting shares/management loan complexity—were framed as shareholder-friendly and a sign of evolving succession planning. Why the market discounts Canadian consolidators (Priority: 3/5): The conversation attributes some of the underperformance to Canadian-market skepticism toward leverage and a tendency for public markets, especially in Canada, to leave stocks undervalued longer than U.S. peers.

Key Arguments: DentalCorp is a high-quality roll-up with durable demand, limited cyclicality, and a long runway because Canada has roughly 15,000 dental practices and the company owns only about 550. The stock is undervalued relative to public and private-market comparables; Buckley argues valuation should be closer to mid-to-high teens EBITDA multiples rather than the current level. The 2022 sale process failed primarily because debt markets shut down after Silicon Valley Bank, not because the business was weak. Management’s current focus on debt reduction is rational because the market penalizes leverage; reducing leverage may be the fastest route to a higher multiple. Buybacks are not management’s first priority because practice acquisitions at ~7x EBITDA are more accretive than repurchasing stock at a higher implied multiple. The Canadian dental model is attractive because patients pay directly and reimbursement risk is lower than in the U.S., while oral-health compliance is higher. Private equity interest validates the model; multiple top-tier sponsors have rolled up dental assets because the economics are compelling. A U.S. listing could help liquidity and valuation, but Buckley believes the Canadian market should eventually recognize the business’s value even if it takes longer.

Data Points: Practices owned: ~550 - DentalCorp’s current portfolio size in Canada Total Canadian dental practices: ~15,000 - Estimated addressable market for consolidation Practices meeting DentalCorp criteria: ~5,000 - Management/guest estimate of higher-quality target pool Organic same-practice growth: ~4% - Driven by pricing and volume Pricing contribution to organic growth: ~3% - Major component of same-practice sales growth Acquisition-driven growth: Low teens overall growth - Organic growth plus acquisitions Corporate spend increase: ~$6 million - Prior investments in corporate infrastructure and software that should later leverage EBITDA transaction multiples: 12x-17x - Observed transaction range for comparable deals Best comparable deal: 17x EBITDA - July 2022 transaction referenced as peak comp Suggested haircut to best comp: ~15x EBITDA - Buckley’s estimate for a more current private-market value MB2 Dental expected sale range: 15x-17x EBITDA - Cited as evidence private-market demand remains strong Current leverage: ~4.3x - DentalCorp’s leverage level discussed in the interview Peer leverage: ~7x to 8x - Management says peers are more levered Stock trading volume: $1M-$2M/day - Average liquidity on the exchange Dentist retention after five years: 90%+ - Retention of acquired dentists after the initial contract period Dentist retention since 2011: 93% - Management figure cited for dentists acquired since 2011 Practice margin uplift after acquisition: 10%-15% - Practice-level margin increase from acquisition and integration Patient visit frequency before/after integration: 2.1x to 2.5x per year - Management example of increased utilization after technology and communication improvements EBITDA margin expansion guidance: 20-40 bps/year - Expected benefit as corporate investments leverage Potential upside from valuation re-rate: 50%-100% - Buckley’s implied upside range from current levels Free cash flow yield: 10%-11% today; 8.5%-9% previously - Used to argue the stock remains cheap despite rerating Potential future leverage: 7x-8x - Private-equity level leverage if taken private Acquisition pace example: ~50 practices/year - Illustrative rate discussed for potential growth runway

Pivotal Quotes: "I would strongly encourage them to sell the business." — Zach Buckley: Explaining why he published a public letter and what he wants management to consider "A business of this quality should not trade at a double-digit free cash flow yield." — Zach Buckley: Argument that the market is understating DentalCorp’s intrinsic value "We are one of the lowest, if not the lowest, levered healthcare aggregators and definitely one of the lowest-levered dental service organizations." — Graham (as quoted by host): Illustrates management’s emphasis on deleveraging and balance-sheet conservatism

Implications: DentalCorp may be a classic mispriced consolidator: strong economics, defensive demand, and limited liquidity, but penalized for leverage and geography. If leverage falls or a strategic sale emerges, rerating upside could be material.