Last month the chocolate giant Mars made what looked like a rather leftfield acquisition when it agreed to pay US$9.1mln for VCA, America’s largest veterinary chain.
It’s not such an unusual deal when you realise the Snickers and Milky Way maker also owns some of the world’s best known pet food brands.
Even so, there would have to be quite a few cost savings and synergies to make the transaction work – given the take-out multiples involved.
For the confectioner, which also owns Whiskas, Pedigree and IAMS, paid a whopping 19-times last year’s underlying earnings (EBITDA), or 3.8 times revenues.
That’s big bucks but not unusual for the sector, with private equity selling vet chains for anywhere upwards of 15-19 times.
Now, it may be worth just retaining that nugget on valuations (while recognising the fact that private equity is active in the sector) when assessing the investment merits of CVS Group (LON:CVSG).
It is the UK’s only listed pure-play and integrated veterinarian business and second only to Pets at Home in terms of the numbers of outlets (remember PAH is ostensibly a retailer).
At the last count CVS owned 378 vets’ surgeries around the UK after splashing out £63mln last year buying 67.
“People sometimes think we acquire a business and we save lots on the administration. We don’t. The benefits we get are the buying benefits,” says the company’s finance director Nick Perrin.
New additions to the portfolio are also plugged into the company’s crematoria and labs, conferring further savings.
In it last full year, the CVS turned over £218mln, generating adjusted EBITDA £33mln, up 30% and 43% respectively. Like-for-like growth was a more pedestrian but still a respectable 5%.
As well as crematoria and labs, the company also has an online business and last autumn announced plans to provide its own pet insurance. It also runs a Healthy Pet Club preventative medicine scheme with 280,000 members paying £11 a month.
After last year’s flurry of acquisitions, which also included the purchase of three crematoria, the Vetshare buying and the VETisco instrumentation business, the company’s net debt was £93mln at the financial year end.
Last December it raised £30mln from investors, which along with the cash generated by the business will help bring gearing below two-times EBITDA – a level of indebtedness investors are comfortable with.
“It wasn’t that we couldn’t service that debt. The worry was it might limit our opportunities when acquisitions came along,” said Perrin.
With around 5,000 veterinary surgeries around the UK, there’s still plenty of room for growth.
And unlike some of the competition it isn’t limited in what it can acquire.
“We do much more than other people. Pets at Home, for instance, only do small animals. We do farm work and equine; we have labs and referral services and our own out of hours service,” said Perrin.
“The other industry players might do one or two of those, but not everything.”
The CVS finance director admits there is competition out there for deals, which has driven up prices.
However, the company doesn’t tend to pay more than seven-times EBITDA. And on that basis you see why the sector is attractive to private equity: the buyout companies are able to sell businesses for roughly double the amount they are paying (if not more).
Broker Investec reckons the ‘companion animal services market’ (pet care to you and me) is primed to grow around 5% a year for the foreseeable future as owners spend more on their charges with human-style services. And crucially it is “relatively immune to economic pressure”.
So, the fundamentals of the industry are decent. Of course, there are opportunities to export the model and in fact CVS is looking to push into the Netherlands.
City firm N+1 Singer thinks there is the potential to create a £1bn champion of the sector – although it is two-thirds of the way there already.
The shares aren’t exactly cheap on forward 23-times earnings per share, or just under 15-times forecast EBITDA; however, as we have seen with the Mars deal there are those out there willing to fork out those sums.