Pandemic hastens ongoing trend in veterinary consolidation

Investor interest continues to grow even as practice valuations 'skyrocket'

Published: December 30, 2021
Photo by Lisa Hughes
Mars Inc.'s pet-care division opened a new headquarters in Franklin, Tennessee, in 2019. Founded as a candy maker, Mars has become the biggest owner of veterinary hospitals in the world. It has long owned pet food brands and other pet-related businesses, as well.

Frenetic merger activity among veterinary hospitals in 2021 has lifted the market share of corporate consolidators in the United States to close to 50% of all companion animal practice revenue by at least one estimate, as the pandemic spurs demand for pet-care services.

Market consultants and investment bankers expect the deals to keep flowing in 2022, even as prospective buyers confront stratospherically high asset valuations and possible scrutiny from antitrust regulators.

Meanwhile, a professional association for U.S. independent practices has boosted its membership to over 500, as a rapidly shrinking pool of holdouts strives to remain competitive.

Precisely measuring how many practices are being bought by consolidators is challenging because many are private companies that don't have to disclose acquisitions publicly. Analysts, however, can get a handle on numbers by regularly checking practice counts displayed on company websites, calling their executives or talking to other companies in the veterinary supply chain.

In brief

Chicago-based animal-health firm Brakke Consulting estimates between 800 and 1000 independent companion animal practices in the U.S. were snapped up by corporate consolidators in 2021. "That's a bit of an uptick from 2020, when we estimate somewhere between 700 and 800 practices were acquired by corporations," Brakke senior consultant John Volk said in an interview.

Volk reckons about 25% of all companion animal practices in the U.S. are now owned by corporate consolidators. But that accounts for at least 40%, and perhaps closer to 50%, of all client visits, he explained, because corporations tend to own larger practices than independents, including a majority of U.S. specialist referral centers.

Brakke is calculating more precise numbers for an annual report on the sector that it's due to release in January. Back in 2019, it had predicted the 25% corporate ownership mark wouldn't be reached until 2023.

"In the last two years, there's been a tremendous amount of M&A activity and the prices being paid for practices have just skyrocketed," Volk said, referring to mergers and acquisitions. "If you're a nice 6-year-old practice with three or four doctors, your wildest dreams are coming true for what your practice is worth."

It hasn't been unusual for consolidators to pay 18 to 20 times an acquisition target's annual earnings before interest, tax, depreciation and amortization (EBITDA) for "good general practices" in 2021, with deal multiples for some specialty-referral practices going even higher, Volk said. "These multiples are dramatically higher than a year ago when the market tops were in the 12 times and 15 times range." EBITDA is a commonly used measure of business profitability.

Brakke's numbers exclude mergers that have occurred among the corporate consolidators themselves, of which there have been plenty of deals this year, too.

IVC Evidensia, NVA on the move

Among the most active acquirers in 2021 were IVC Evidensia, based in Britain, and National Veterinary Associates (NVA), based in the U.S., which each spent billions of dollars on large targets this year. Even so, the top dog remains Mars Inc., a conglomerate based in McLean, Virginia, best known for making candy. Around 2,500 animal hospitals are under Mars' ownership globally, according to its website.

IVC Evidensia, which is backed by Swedish private equity group EQT and counts food company Nestlé as a minority shareholder, crept closer to Mars in September with the acquisition of Canada's VetStrategy and its 270-odd practices. It also recently bolstered its presence in France with the acquisition last month of VetOne. IVC Evidensia now owns "close to 2,000" practices worldwide, according to its website.

NVA, which is backed by German private equity firm JAB, this year spent billions of dollars on two U.S. specialist referral businesses with 39 large hospitals between them: Sage Veterinary Centers and Ethos Veterinary Health. NVA owns "nearly 1,200" veterinary practices, according to its press releases.

Mars, the owner of brands including Banfield Pet Hospital, VCA Animal Hospitals and BluePearl, also was acquisitive this year, although the only big deals it announced were elsewhere in the veterinary realm. In May, it acquired a controlling interest in Vetsource, an online pharmacy, prescription management and analytics business, adding to a sprawling empire that includes pet food and a large veterinary diagnostic laboratory. In September, Mars bought the cat litter company PrettyLitter.

One of this year's big up-and-comers was Southern Veterinary Partners, which was founded in 2014 by Dr. Jay Price with three hospitals in Alabama. The company, backed by the private equity firm Shore Capital, now owns 303 hospitals and was named by Inc. Magazine as one of the fastest growing private companies in the U.S. this year (ranking no. 862 on a list of 5,000). That rapid growth looks set to continue: Southern Veterinary Partners moved to raise another $200 million in debt funding for more acquisitions.

In an interview, Price said he did not anticipate in 2014 that the business would grow so quickly. "We were fortunate to build a strong foundation with great practices and great doctors before the consolidation trend really accelerated over the last few years," he said. "We learned some hard lessons early with our first 50 locations and have thrived the last couple of years."

Investment bankers agree the veterinary market is running hot.

"Our sense is that veterinary M&A was elevated this year relative to 2020, but measurement is challenged as most small deals do not get picked up in reporting services," said Bryan Jaffe, a managing director at Seattle-based investment bank Cascadia Capital. At least one thing is clear, he said: "It is a great time to be a seller."

Jaffe points to "abundant" demand for veterinary assets by private equity firms, which typically use high levels of debt to buy businesses, then attempt to improve their financial performance before selling them at a profit. Private equity firms have attracted hefty fund inflows to spend on acquisitions in recent years because ultra-low interest rates have made other asset classes, such as cash and bonds, less attractive to investors. Many of the firms are spending that money on veterinary practices made more valuable by a surge in demand for pet-care services during the pandemic.

While opinions are divided on the true extent of a so-called pandemic puppy boom, few industry watchers doubt that people forced to work from home have been paying more attention to their pets — and have had more money to spend on them.

"Pet care comes out of disposable income, and the market's been awash in disposable income because people weren't taking vacations, going to restaurants, going to movies," Volk said. "And in the U.S., and I suspect in some other countries, the government was pumping an incredible amount of money into the economy."

For his part, Jaffe said the value of veterinary hospitals also is being pushed higher by a veterinary workforce crunch. "Major vet clinics have a human capital crisis," he said. "They don't have the vets to cover slack shifts, so they need to acquire other clinics for the doctors."

What will 2022 look like?

Market watchers expect 2022 will be another busy year for acquisitions in the veterinary realm, as private equity groups, still flush with cash, buy their first "platform" veterinary asset, or continue "rolling up" multiple purchases.

"There will absolutely be continued consolidation in the coming year," said Tom Elliott, managing director, consumer investment banking, at Tampa-based Capstone Partners. "I field calls on a regular basis from private equity firms that want to initiate a new roll-up in the [veterinary] space," he said. "Finding their platform acquisition is always their challenge but I expect them to continue to find ways to get in the game."

Cascadia Capital's Jaffe notes that rising cost pressures for veterinary practices, such as higher doctor salaries and equipment prices, are tempting independent owners to sell. "We think private equity will continue to deploy record capital in the space," he said.

For its part, Southern Veterinary Partners isn't targeting a specific number of acquistions. But Price said he expects the market to remain buoyant, in part due to what he saw as an "unprecedented" number of new pets entering households during the pandemic. "That, combined with generational views on a pet's place in a household and the subsequent spending associated with this, will continue to drive demand," he said. "In addition, we know people spend more on their pets as the pet ages and needs more care as a senior. Because of all this, demand will remain high for years to come."

Still, Brakke's Volk cautions that demand for pet care services won't boom indefinitely, especially if interest rates rise. "Prices and wages are going up, but that can't last forever," he said. "Whenever disposable income starts stagnating again ... it's going to affect pet care." But for the moment, he says, "Right now, veterinarians and the companies are having a great year, and I expect they'll have a good 2022."

Another factor that might come into play next year is increased regulatory scrutiny of mergers, given how concentrated the veterinary market has become. Jaffe and Volk believe it would take a pretty big deal to bring competition regulators off the sidelines, though.

"Antitrust is of little concern, though Mars can't probably buy another major player in the U.S.," Jaffe said.

That doesn’t necessarily mean Mars must sit still. "If Mars were to purchase a company with 100 general practices, I don't think that would be an issue at all for the Federal Trade Commission," Volk said. "But if they were to, say, try to acquire NVA or Pathway, then the FTC would probably have something to say about that. They might not prevent it, but Mars would probably have to make some divestitures, such that they weren't the dominant player in any one market."

Capstone's Elliott said many investment banks are wary of moves by some politicians to toughen antirust rules. Big tech companies appear to be their main target, but stricter rules could have implications for other sectors, such as animal health. "It is too early to tell how it will play out, but deal makers are definitely nervous if the roadblocks being put out there become insurmountable," Elliott said.

Aside from acquiring more businesses, another option that private-equity companies could pursue is to sell their hospital assets publicly via a sharemarket listing. "My guess is that one or two of the big consolidators will go public in 2022," Volk said.

In the meantime, some closely watched antitrust test cases are playing out in the United Kingdom, where corporate consolidators also are rapidly increasing their market share. Britain's Competition and Markets Authority is currently probing two acquisitions of veterinary practices recently completed by CVS Group and Vetpartners, respectively, to assess whether they have substantially lessened competition. The results of both investigations are due in the new year.

Independent practices band together

However 2022 pans out, independent practices will find themselves having to compete with ever-larger corporations that can use their size advantage to run more efficient operations at a time when supply chain bottlenecks are pushing up operating costs.

A growing number of independent practices in the U.S. have joined the Independent Veterinary Practitioners Association (IVPA), which was founded in 2018 and offers members services to help them compete more effectively. These include retirement and employee benefits plans, marketing services and discounts from suppliers and service providers. The IVPA also works to educate veterinary students about the value of working for or owning an independent practice.

IVPA president Dr. Bonnie Bragdon considers the future bright for independent practices because, in her view, they have unique strengths. She fears for the fate of practices acquired by corporate consolidators that don't meet profit targets.

"I have heard through a number of brokers that corporates are starting to divest from poorly performing hospitals, which could increase problems with socioeconomic and geographic areas that are poorly served or underserved," Bragdon said in an interview.

"Independently owned and locally operated veterinary practices bring unique value to veterinary health care providers, patients, and consumers," she maintains. "[They] create profit by focusing on developing strong, personal relationships with employees and consumers first, in contrast to corporate practices, which profit by creating organizational efficiencies and increased production."

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