Consolidation In the Red-Hot U.S. Pet Care Market

In this week’s episode, we’re talking about consolidation in the U.S. pet care market. Joining host Julie-Anna Needham is Dane Hamilton, healthcare editor for Mergermarket. Dealcast is presented by Mergermarket and SS&C Intralinks.

In this episode, you’ll learn about:

• The outlook for the pet market and how players in the sector are positioning themselves
• How M&A reduces administrative costs
• Private equity’s strong interest in the space
• Recent deals and high multiples for premiere practices

TRANSCRIPT

[MUSIC PLAYING] JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham, a journalist who's been covering M&A for a decade. In this episode, we're talking about consolidation in the U.S. pet care market. I'm joined by Dane Hamilton, health care editor for Acuris.

[MUSIC PLAYING]

Hi, Dane. Thanks for joining me today.

DANE HAMILTON: Thank you for having me.

JULIE-ANNA NEEDHAM: So, in recent years, we've seen lots of growth in the US veterinary space including pet hospital providers, vet practices, and pet supplies businesses. What's the outlook for this market, and how are players positioning themselves to compete in that space?

DANE HAMILTON: Basically, the market for our companion animals, with dogs, cats, whatever, has grown dramatically in recent years. Particularly with COVID, more people rely on their pets for companionship because they may be shut in or social distancing. So according to industry figures, some 70 percent of US hospitals own at least one pet up from 56% in 1988. So that's big growth.

And pet expenditures have also gained this result for obvious reasons. So according to the American Pet Products Association which is the key trade group, pet owners spend USD 104 billion in 2020 on their pets up from USD 90 billion in 2018. And that includes USD 42 billion on pet food, USD 31 million on pet care -- vet care and products, so it's a big market. And obviously, we're talking about companion animals here, mainly dogs and cats. So it's a big market, and that's why we've seen a lot of growth in these vet practices.

JULIE-ANNA NEEDHAM: And I will firmly into those statistics. We had a cat that died two years ago when we got a dog about six months later during one of the many lockdowns we've had in the U.K. But it seems that just about everybody I know got a dog over the past 12 to 18 months. So it's obviously a big and growing market. I think that's a trend that's been -- it's reflected in the UK, the US, and probably in many other countries as well.

DANE HAMILTON: Yeah, and it's also-- I mean, every one of those dogs and cats at some point is going to need veterinarian care either for vaccines or for sickness and so-- So we're talking, in the US, there's something like 100,000 vets to serve whatever it is for the number of dogs. I think it's 76 million I saw somewhere of dogs alone. So that's a huge number of animals for a relatively small number of providers of medical care for these animals. So it's a big market.

JULIE-ANNA NEEDHAM: And so how is that prompting the vet practices to become larger?

DANE HAMILTON: It's a very interesting question. I mean, in recent years, we've seen a lot of just overall medical practices in general of all kinds of stripes have been emerging in the US in particular because it's a private market. So they merged to create costs and efficiencies of scale to reduce costs and become more efficient.

We've seen it in dental practices, primary, specialty, doctor groups, oncology nephrology, physical therapy. All these groups emerging in private equity has taken a strong interest in this space because of the steady cash flow and the ability to leverage and the ability to do M&A through bolt-on acquisitions.

And the basic-- so they've been merging into these groups called veterinary practice management groups or medical practice management groups. And the basic concept is that the larger group will take over the admin, the administrative work, billing, insurance, patient interaction like appointment scheduling, IT, and other services so that medical professionals, doctors, dentists, or whoever can focus on their job.

So just an answer to your question, the administrative burden and complexity of medical practices including veterinarian practices has grown exponentially in recent years. So there's a major benefit to these groups to merge with larger players. So that's what's driving a lot of the consolidation in the space.

Talking specifically about veterinarian groups, the cost of-- the admin burden for doctors including vets has grown dramatically a lot more. People have pet insurance. They have to bill for it. The complexity of pet insurance and pet treatment has dramatically increased.

I don't know about the U.K., but, in the U.S., there's a growth of pet hospitals that conduct major surgeries on your animal. They do cancer treatment. They do joint replacement. They do all the kinds of things that they do for humans but now for dogs.

And so it's become larger of a business than it used to be when, say, in the 30 to 40 years ago when you graduated from vet school and you hung out a shingle. And you got paid-- the animals to be treated, but it wasn't as complex. A lot of times, if you couldn't treat your animal, you just put them down.

JULIE-ANNA NEEDHAM: Some interesting trends there are that people are prepared to spend so much money on their pets and keeping them alive.

DANE HAMILTON: Yeah, and it's also affluence. I mean we have a much more affluent society than we ever did. And people can afford to spend money on their pets. And it's like we spoil our kids to get them pets, you know. I know from personal experience, my kids are always asking for pets. And we try to give in a little bit, but that's a whole another story.

JULIE-ANNA NEEDHAM: So can we turn our attention to looking at deals in the space that kind of exemplifies this trend. What kind of deals are you seeing? What kind of multiples are they achieving?

DANE HAMILTON: OK. So, obviously, with the huge number of pets in the country or companion animals, limited supply of highly trained vets, schools can only turn out a certain number of vets each year. You have high multiples for the premiere practices. And we're talking about practices that have already consolidated. It's still a very fragmented industry. There's still a lot of small vet practices. But increasingly, just like in the medical practice space, we're seeing them emerge into larger groups.

So the biggest deal this year is so far in the US was a company called AmeriVet Veterinary Partners which is sold to AEA investors, a giant private equity firm, and Abu Dhabi Investment Authority, a sovereign wealth fund, for USD 1.6 billion. So that company has around 60 million of EBITDA. So that equates to roughly almost 27 times EBITDA multiple which is by any standards a big multiple.

I mean it's a big company that operates 139 vet practices in 21 states with 2,200 employees. But those kind of multiples -- and we're talking -- for typical dog practices, we're talking mid-teens multiples. So for those kind of multiples, it's putting-- it's prompting a lot of companies to consider sale processes.

So processes on the block that we've written about in recent months include encore vet which has a bunch of veterinary hospitals owned by North Castle around 50 million of EBITDA. They are exploring a sale. We've reported it in recent months.

And then you have CareVet. It's owned by Compass Group. It's on the block through Lincoln International, around 50 million of EBITDA, Rarebreed Veterinary Practices owned by Halle Capital, they were on the block with Lincoln as of last October. I'm not sure where that process is at, Mission Veterinary, partners.

I mean it's just a lot of -- there's also a number we can talk about because we haven't gotten them fully sourced. But there's a lot of assets on the block because, once again, high multiples cause people to sell their businesses much faster just like supply and demand kind of thing. And there's been a number of ones that have been completed which I could talk about if you're interested.

JULIE-ANNA NEEDHAM: Yeah. If you could just touch on those, that would be great.

DANE HAMILTON: So a private equity firm called L Catterton, but Alliance Animal Health from Lightbay Capital owned that was advised by Harris Williams, an EBITDA of 20 to 25 to 30 million veterinarian practice partners, sold by Audax -- I mean sold to Audax. [INAUDIBLE]-- the list just goes on and on. And a lot of the same banks, because they develop an expertise in this kind of space, will represent the sellers and buyers.

I think the top names in the business are Harris Williams, Jefferies, Lincoln International. These are banks that work a lot in the middle market. Middle market to find is anything under USD 2 billion, usually an asset valuation, although they can go much larger. So it's really an interesting -- it's really an interesting space. And there's a lot of consolidation more to do because, once again, it's a fragmented space.

JULIE-ANNA NEEDHAM: Yeah. I was going to say, it sounds like it's a very fragmented market with loads of individual players that are being kind of slowly subsumed by the groups which are then seeing further consolidation by kind of merging or taking over with other groups.

DANE HAMILTON: Yeah, because a lot of doctors just don't -- a lot of medical people just don't want to deal with the admin part of it. And the admin part has just gotten exponentially more challenging.

JULIE-ANNA NEEDHAM: And what's the ultimate outcome for these consolidations? Do you anticipate there being IPOs?

DANE HAMILTON: Yes, I do. I mean once they get -- once these groups get to be large, over a billion, there's a limited probably pool of larger private equity firms that are going to buy them. So then they start looking for other options such as IPOs. For instance, this company called National Veterinary Associates, major chain of vet hospitals, they're over 1,100 facilities, none in the US, but also Canada, Australia, New Zealand has been speculated as an IPO candidate.

They merged last year with this company called SAGE Veterinary Centers which is owned by Chicago Pacific, last year making it even larger. So they have the kind of size metrics for being a public company. The other option we still probably explore is being sold to a strategic.

The comparison that's often made is UnitedHealth, giant insurance company, has been buying up doctor groups left and right, really large doctor groups, for oftentimes over a billion dollars, which they don't even announce because they're not even -- it's not even material to the business. So that's kind of as an insurer by a doctor group becomes like a kind of advancement of their business strategy.

Same thing could happen to veterinary groups. They could be sold to veterinary and products makers or strategics that deal with a lot of animal health. So we'll see what happens. But there's only a limited number of options once you get to be very large. And so it's going to be interesting to watch.

JULIE-ANNA NEEDHAM: And with the IPOs, is there a lot of appetite from investors kind of keen to get in on the trend?

DANE HAMILTON: Well, I definitely think so because, if you're a public company, you can use your public currency or your shares to buy more businesses. And so, as they become public, they can grow even more. I think they become with high multiples that they're attracting. I think they become even more attractive to investors. So yeah, definitely.

JULIE-ANNA NEEDHAM: Great. Dane, Thanks very much.

DANE HAMILTON: OK. Well, thank you.

JULIE-ANNA NEEDHAM: That was Dane Hamilton, health care editor for Acuris. Thanks for listening to this week's episode of Dealcast presented by Mergermarket and SS&C Intralinks. Please rate, review, and follow the podcast. You can find us on Apple podcasts, Spotify, or look out for your Mergermarket news alert. For more information, check out our show notes. Join us next week for another episode.