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Young veterinary companies enjoy growth spurt

Antitrust interventions open door for small, midsized consolidators

Published: August 03, 2022
Photo courtesy of of Rarebreed Veterinary Partners
Dan Espinal (left) and Sean Miller (right) founded Rarebreed Veterinary Partners in 2018, having both worked previously in senior corporate development roles at diagnostics giant Idexx Laboratories Inc. Rarebreed, which owns around 130 veterinary hospitals in the U.S., is among a troop of small and midsized consolidators undergoing rapid growth.

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A few years ago, nobody would have heard of Rarebreed Veterinary Partners, United Veterinary Care or Veritas Veterinary Partners — because they didn't exist.

Today, following blistering growth, the three companies own hundreds of veterinary practices in the United States between them, including dozens of specialty and emergency hospitals.

They are the latest movers and shakers in a profession in which ownership continues to become increasingly concentrated, though the rules of the game appear to be tilting slightly in favor of these fast-growing startups.

In recent months and years, and with rising vigor, competition regulators have started intervening in takeovers of specialty and emergency hospitals pitched by the two biggest fish in the pond: Mars Inc. and National Veterinary Associates. That's opening the door for smaller rivals to bid more competitively for veterinary hospitals and increase their market share.

"If the big boys can't be looming out there as a potential acquirer, then it may suppress the prices being offered for hospitals," said Tom Elliott, managing director of Boston-based investment bank Capstone Partners, which advises on takeovers in the veterinary realm.

Speculation, Elliott said, is mounting that antitrust regulators such as the U.S. Federal Trade Commission will turn their attention to deals involving general practices, too. In recent weeks, the FTC has expressed alarm about the rising power of private equity firms in the profession. Regulators in the United Kingdom, meanwhile, have this year blocked two takeover deals involving general-practice clinics attempted by large consolidators.

"For those of us who work in the world of mergers and acquisitions, antitrust is a real consideration now,” Elliott said, noting that the Democrat-controlled FTC has been intervening in various industries, including tech, energy, human health care and veterinary medicine.

One up-and-comer in the veterinary domain is Portland, Maine-based Rarebreed, which in June acquired another relatively small group, Vet's Best Friend, helping to grow its practice count to around 130. Rarebreed is backed by private equity firms Revelstoke Capital Partners, Trilantic Capital Partners and Halle Capital, among other investors. It was founded in 2018 by Dan Espinal and Sean Miller, former corporate development and strategy executives at Idexx Laboratories Inc.

In brief

* Corporate consolidators still are snapping up independently owned veterinary hospitals, though the two biggest — Mars Inc. and National Veterinary Associates — are encountering antitrust hurdles, benefiting their smaller rivals.

* When an antitrust regulator orders a company to sell assets, smaller players can bid to acquire them, though they must convince the regulator that they have the financial wherewithal to run the assets competitively.

* So far, regulatory intervention in the U.S. has involved only specialty and emergency hospitals, though speculation is mounting that regulators such as the Federal Trade Commission will turn their attention to general practice, too.

* Senior executives at consolidators say demand for pet care is cooling and price tags for veterinary hospitals are falling as rampant inflation bites.

Chief executive of Rarebreed, Espinal previously helped ramp up a company's growth without attracting regulatory intervention: Idexx, his former employer, now dominates the veterinary diagnostics market alongside Mars-owned Antech Diagnostics. But he notes that unlike diagnostics companies, which sell their products and services to other companies, veterinary hospitals serve the public, making the biggest players perhaps more likely to hit regulatory roadblocks.

"The veterinary hospital market is tiny relative to the size of many other markets, so it's interesting that the FTC is looking at it so closely," Espinal said. "But certainly, some of the bigger groups have massive stakes, and I think it's appropriate that the industry remains at least somewhat diversified for pet owners — and for employees of veterinary companies, as well."

In June, the FTC ordered NVA, which owns more than 1,400 practices globally and is owned by German private equity firm JAB, to offload 11 specialty and emergency hospitals in the U.S. NVA agreed to the sales to win the regulator's blessing for its acquisitions of Sage Veterinary Centers and Ethos Veterinary Health. Waiting in the wings was United Veterinary Care, which picked up nine of the 11 divested hospitals for an undisclosed sum.

Based in Palm Beach, Florida, United was founded in 2019, and has grown rapidly to own 109 practices, not including the nine it's picking up from NVA. The company, headed by veterinarian Dr. Scott Crawford and backed by Swedish private equity firm Nordic Capital, did not respond to requests for comment.

The other two of the 11 hospitals that NVA was ordered to divest were picked up by Veritas Veterinary Partners, founded in March by another veterinarian, Dr. Thomas Scavelli, with the backing of private equity firm Percheron Capital. A press release issued by the company last month said it has "over 100" specialty and emergency care "providers," without elaborating. Veritas' website lists seven hospitals, with two more under development. Veritas did not respond to requests for comment.

How divestments ordered by the FTC work

When big companies such Mars or NVA are ordered to divest assets, smaller players can step in and snap them up. But they won't necessarily get them for a steal.

If the FTC intervenes, it's up to the company that it's scrutinizing to find a divestiture buyer. The regulator then decides whether to approve the new deal. "So the FTC is not actively involved in the process at first … but it ends up saying either 'yes' or 'no,' " FTC spokesperson Betsy Lordan confirmed.

Among the FTC's main considerations is how big the new nominated buyer is. If it, too, has a high share of a given market, the FTC might not approve of that prospective buyer, either.

The regulator also will want assurances that the new buyer has the financial wherewithal to run the divested business competitively. It does so to ensure that companies don't intentionally sell divested businesses to rivals they know will struggle to compete.

Hospital price tags fall

In the wake of a spike in demand for pet care during the pandemic, the veterinary profession faces fast-changing economic conditions. Spiraling inflation has triggered interest-rate rises and is weighing on household spending power.

At the same time, though, the higher cost of debt is lowering the amount bidders are paying for hospitals as a multiple of their annual earnings, giving consolidators of all sizes the latitude to keep growing by acquisition.

"Deal multiples are actually coming down pretty fast," said Dan Espinal, chief executive of Rarebreed Veterinary Partners, which owns around 130 hospitals in the U.S. Espinal said multiples had peaked in the high teens, perhaps higher in some cases. "We're seeing that come way down to the low double digits, and I expect it's going to get even lower as we start to feel some of the pain from what appears to be a recession."

Rarebreed, he said, wants to keep acquiring hospitals, even as demand for pet care cools. "With demand, we're hypothesizing that it's falling back to pre-pandemic norms from a volume perspective. That said, people who are going into the vet seem to be subscribing to higher standards of medical care."

Meaning fewer pet visits won't always necessarily translate into reduced income for practices.

Tom Elliott, managing director at investment bank Capstone Partners, mostly advises owners who are trying to sell their hospitals. He said falling practice prices could prompt aspiring sellers to take their assets off the market, thereby lowering the supply and causing multiples to rise again.

Another consolidator, Southern Veterinary Partners, expects price tags for practices to keep falling if interest rates continue to rise, as many economists predict.

"Last year was the perfect seller's market with easy access to cheap debt and overconfidence that the elevated demand for veterinary services created by the pandemic would last in perpetuity," the company's chief, Dr. Jay Price, said. "Now that we are in a hyperinflation environment, clients don't have the same level of discretionary income they had 12 months ago, so veterinary service demand has started to flatten out and in some areas decline."

A cooling of demand is easing pressure on overstretched veterinary teams, though executives contacted by the VIN News Service said they expect labor shortages to remain a challenge for the profession.

Price expects demand for pet care to bounce back, reasoning that younger pets that joined households over the past two years will require more medical attention as they age.

"The biggest challenge our profession currently faces is, how do we prepare to meet that demand?" he said. "We saw what happened during Covid and the impact it had on our care providers. Will we learn from that and push for changes, or will we say Covid was a once-in-a-lifetime phenomenon and revert back to old habits?"

"When the FTC is looking for a divestiture, they want to create competitive conditions that fully replicate the competitive conditions before the main transaction," said Washington D.C.-based attorney Leon Greenfield, who specializes in antitrust law. "So, in other words, they're looking for a buyer that is capable of carrying forth the assets in an effective way and will be looking to compete aggressively over the long term."

Accordingly, Greenfield said the regulator might be reluctant for an asset to be sold to a company that owns only one or two veterinary hospitals, should economies of scale be required to compete effectively. And it may be in the buyer's interest to offer a reasonable price for the asset. "The FTC doesn't care whether the seller can't get a very good price," Greenfield said. "But they might be suspicious if a buyer is paying next to nothing."

Greenfield said that the FTC's seemingly growing interest in the veterinary realm could open the market for smaller and midsized consolidators. As a case in point, he notes that the FTC is placing additional strictures on large companies that force them to get prior regulatory approval before they can acquire assets in certain geographic areas. Last month, for instance, such strictures were imposed on NVA, should it attempt to acquire specialty and emergency hospitals in certain parts of California, Colorado, Maryland, Texas and Virginia.

"If you're a serial acquirer, that can be a big issue," Greenfield said. "It may mean that you're at a serious disadvantage in bidding for new assets in those areas." The disadvantage comes down to the fact that the FTC can take many months to approve acquisitions, giving rival bidders a time advantage, not to mention the promise of greater certainty that their bid will close.

In the event that companies pick up assets from divestments ordered by the FTC, they likely will have to honor any contractual obligations that had existed between the previous owner and original seller. "I would expect a 98% chance that the agreements are assignable to a buyer of the practice or practice assets," said Dr. Lance Roasa, a veterinarian and lawyer.

At the same time, though, veterinarians and other staff members at divested practices might want to check if their employment agreements, including any noncompete clauses, remain intact. "The employees may have an 'out' depending upon a new transfer or might be 'stuck' with the new acquirer until their employment terms are up for renewal or negotiation," said Raphael Moore, general counsel at the Veterinary Information Network, an online community for the profession and parent of the VIN News Service.

Should smaller consolidators look over their shoulders, too?

Elliott, the investment banker, says Capstone Partners regularly hosts guest speakers to address the firm on topics relevant to mergers and acquisitions. One recent speaker was an antitrust lawyer, who said the Biden administration "has gone full activist" when it comes to scrutinizing deals.

Elliott, like Rarebreed's Espinal, reckons the FTC is eyeing owners of veterinary hospitals because they sell products and services direct to consumers.

"So many people have pets, so many people are at the vets', so I think it's absolutely a way for them to get in front of voters and say, 'We're for you, little guy. We're trying to protect the consumer here.' "

Consequently, Elliott suspects that it's not just the biggest players that should be looking over their shoulders.

He estimates there are around 35 veterinary consolidators in the U.S. that are backed by private equity firms. These include Thrive Pet Care, MedVet and PetVet (each of which happened to acquire a few specialty and emergency practices from Mars and NVA following divestment orders issued by the FTC in 2017 and 2020, respectively). Other relatively large private-equity-backed players include VetCor, American Veterinary Group and Southern Veterinary Partners.

Many are growing rapidly via "roll-up" strategies, which involve purchasing ever more hospitals to benefit from economies of scale. The end game for the private equity firms is to sell their interests in the hospitals for a profit, potentially to a bigger player.

More intense FTC scrutiny could hinder a strategy that depends so heavily on shopping assets. Still, Elliott estimates that around two-thirds of U.S. clinics remain independently owned, giving consolidators some wiggle room.

"I would anticipate that the deals are going to keep coming," Elliott said. "But I would also anticipate that the folks that are looking to exit their rolled-up entities are the ones that need to think twice about how big they want to get. If antitrust becomes an issue, then, all of a sudden, they could be holding a hot potato."

If the regulator does start intervening more often, Elliott said small and midsized consolidators could perhaps sell assets to other private-equity companies that want to gain a foothold in the veterinary realm. "But the possibility is that more regulatory intervention will dampen the prices being paid."

Rarebreed, as far as its growth aspirations are concerned, isn't especially worried about FTC interventions, at least not yet. "The way we see it, there's probably about 50% of the market, not even that, consolidated for general practices," Miller, the company's chief operating officer, said. "So there's a long runway to go, there."

One of the more established midsized players, Southern Veterinary Partners, which was founded in 2014 and now owns 330 practices, isn't concerned at this point, either.

"Given the number of smaller consolidators owning and vying for general practices and the number of independently owned hospitals, I don't see [antitrust] as being an issue," Dr. Jay Price, Southern Veterinary Partners' chief executive, said via email.

"I only think it becomes an issue once larger to midsize consolidators start acquiring the smaller consolidators. This has happened on the ER/specialty side but we have yet to see it play out that way on the general practice side in recent years."

Last December, Chicago-based animal health group Brakke Consulting estimated that about 25% of all companion animal practices in the U.S. were owned by corporate consolidators. But that accounted for at least 40%, and perhaps closer to 50%, of all client visits, it said, because corporations tend to own larger practices than independents, including a majority of U.S. specialist referral centers.

This story has been corrected to indicate that Veritas Veterinary Partners said in a press release that it has a network of over 100 specialty and emergency care "providers." The company did not elaborate on whether "providers" meant clinics or staff.

VIN News Service commentaries are opinion pieces presenting insights, personal experiences and/or perspectives on topical issues by members of the veterinary community. To submit a commentary for consideration, email news@vin.com.

Information and opinions expressed in letters to the editor are those of the author and are independent of the VIN News Service. Letters may be edited for style. We do not verify their content for accuracy.

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