Executing Balance Sheet Restructurings



Castle Dental Centers, Inc.



Executing a Balance Sheet Restructuring

Company: Castle Dental Centers, Inc.

Position: Healthcare

Location: Houston, Texas

Date of Investment: May 2003

Exit Date: June 2004

Company Description
Castle Dental Centers was a provider of administrative and support services to dental clinics in Texas, Tennessee, Florida, and California. Castle Dental provided administration, staffing, human resources, purchasing, marketing, finance, and information technology support services to more than 200 affiliated dentists and their staffs in 77 dental centers. Castle Ental utilized a branded, retail-focused operating model, stressing convenience and high quality dentistry at affordable prices.

Castle Dental was formed in 1981 by Jack H. Castle, D.D.S. as a single location, multi-specialty dental practice. Over the next 15 years, Dr. Castle expanded the company to 10 centers all operating in Houston. After an initial public offering in 1997, Castle Dental's management team pursued an aggressive expansion strategy—they opened or acquired more than 60 new dental centers across four states.

By 2001, Castle Dental had depleted all its cash and incurred substantial indebtedness to execute its growth strategy. Unfortunately, an inability to realize lofty sales and profit projections left Castle Dental unable to service its debt. In response, Castle Dental's board replaced senior management and attempted to stabilize the business by reducing costs and closing unprofitable locations. In early 2003, having stabilized the business, certain of Castle Dental's senior lenders were willing to sell their bank debt at a deep discount. In response, Castle Dental's new management began a process to seek new equity capital to recapitalize the company. Sentinel prevailed in a limited auction due to its multi-unit retail experience, strong rapport with management, and its long-standing relationship with one of Castle's lenders. Following Sentinel's investment, Castle Dental remained a publicly traded company.

The Opportunity
• To acquire an dental platform with a recognized brand name at a favorable valuation and re-establish stability to the business

• To invest in a recession-resistant industry with a promising growth outlook fueled by favorable demographic trends

• To acquire a business with the potential to generate strong growth with sustainable unit economics in a sector that was temporarily out of favor with many investors

Right-sized Castle Dental's Balance Sheet: Sentinel's investment allowed Castle Dental to reduce its senior debt by approximately 70%, providing management with flexibility to operate and grow the business.

Stabilized the Company: After several years of uncertainty, management turnover, and the presence of turnaround consultants, Sentinel brought stability to Castle Dental, which enabled management to focus on building the business.

After restructuring Castle Dental's balance sheet and executing an operational turnaround, Sentinel received several unsolicited inquiries from strategic buyers, who had been closely watching Castle Dental's progress. In June 2004, Castle was sold to Bright Now! Dental, Inc., in a highly successful transaction for Sentinel, management, and the public shareholders.

Case studies have been selected for illustrative purposes for management teams of midmarket companies considering a partnership with Sentinel and should not be considered an offer or solicitation of services or an actual or implied endorsement of Sentinel or any security, investment, or portfolio company. The portfolio companies highlighted are not representative of all current and prior investments of Sentinel. A list and description of investments since Sentinel’s inception is available on this website.