Back to top

Image: Bigstock

Sun Life (SLF) to Expand Dental Business With DentaQuest Buyout

Read MoreHide Full Article

Sun Life Financial Inc. (SLF - Free Report) has agreed to acquire DentaQuest for $2.475 billion (C$3.1 billion) through its U.S. business to provide an impetus to its dental business. The transaction, following the fulfilment of customary closing conditions and regulatory approvals, is projected to be closed by the first half of 2022.

Established in 2001, Boston-based DentaQuest is the largest provider of Medicaid dental benefits, with growing Medicare Advantage, Affordable Care Act and commercial businesses and growing access to oral care. DentaQuest, the second largest national provider of Dental benefits, with 33 million total members, remains focused on the growing U.S. government programs space.

It remains focused on improving the oral health of people through its Innovative Preventistry model. It has a prevention-led approach to better care, expanded access, value-based financing, and innovative solutions.

DentaQuest has outperformed its peers in the recent years. It is well equipped with superior claims management and scalable infrastructure, a strong network of dental providers, and provides high-quality dental care and insurance benefits in the United States, with an emphasis on government programs.

Financing the Deal

The deal will be financed with the combination of cash (40%) and subordinated debt (60%) and is expected to maintain a strong pro-forma SLF LICAT ratio of 137% and a financial leverage ratio of 27.6%.

Rationale Behind the Deal

The buyout of DentaQuest is considered a strategic fit for Sun Life as it is expected to increase the scale of its U.S. business, which will poise the company to provide better outcomes for clients. It will expand the acquirer’s leadership in the U.S. dental benefits space.

The deal is also expected to add to the top-line growth of its U.S. employee benefits and place Sun Life as a leading dental benefits provider in the United States. Sun Life will be well poised for growth in commercial, government programs and care delivery spaces.

Sun Life U.S. offers dental benefits for employee benefits plans and has an extensive national commercial dental network.

Therefore, the addition of DentaQuest aligns with Sun Life's business strategy to focus on health and group benefits in the United States.

The recent deal to acquire DentaQuest appears to be financially attractive as it is estimated to augment the underlying earnings per share by C$0.17 and underlying return on equity by 42 basis points (bps) in 2022 on an annualized basis. In 2024, the transaction is projected to contribute nearly C$0.24 to underlying earnings per share and 50 bps to underlying return on equity after realizing expense synergies.

In 2024, run-rate cost synergies of $60 million are estimated to be achieved while transaction and integration-related costs are estimated to be $250 million.

As far as DentaQuest is concerned, this buyout will boost and reinforce its existing capabilities. The CareQuest Institute for Oral Health, DentaQuest’s majority parent organization, is also expected to gain from the deal. The transaction will enable CareQuest Institute to broaden its strategic priorities.

Inorganic Growth Story

Sun Life considers acquisitions a prudent approach to ramp up its growth profile. Strategic buyouts have positioned it as the second-largest dental network in the United States, consolidated its footprint in Vietnam, Indonesian and India, and expanded its wealth business in Hong Kong.

In July 2021, this Zacks Rank #3 (Hold) insurer acquired Pinnacle Care International (PinnacleCare), which will consolidate Sun Life's U.S. Stop-Loss & Health business. Its services will help Sun Life improve health outcomes, and cost management while lowering stop-loss claims of its clients.

The acquisition of the majority stake in BentallGreenOak, which added to its real-estate capabilities; the buyout of the majority stake in InfraRed that boosted the investment solutions of Sun Life's alternatives asset management business; and the acquisition of a majority stake in Crescent Capital Group, marking its investment in the private credit domain and ensuring a greater yield, are its other strategic endeavors.

Other Acquisitions in the Same Space

There have been a host of acquisitions in the insurance space of late, given its significant capital availability. Brown & Brown, Inc.’s (BRO - Free Report) subsidiary Bridge Specialty Group, LLC acquired substantially all assets of Gremesco of New Jersey, LLC. Marsh McLennan’s (MMC - Free Report) Marsh McLennan Agency acquired Vaaler Insurance. Arthur J. Gallagher & Co. (AJG - Free Report) acquired Alpha Surety & Insurance Brokerage, LLC.

Price Performance

Shares of the third-largest insurer in Canada have gained 25.8% in the past year, outperforming the industry’s rise of 4.9%. Sun Life’s focus on the expansion of its Asia business and global asset management business, favorable business mix, strategic acquisitions and solid capital position should help the stock sustain the momentum.

Zacks Investment ResearchImage Source: Zacks Investment Research

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Published in