M&A in the Veterinary Sector – Mass Consolidation

The two most acquisitive companies in the UK over the course of 2019 were groups in the veterinary care sector, according to a report published by Corporate Financier. The companies are Independent Vetcare (IVC), which completed 22 acquisitions in 2019, and VetPartners, which completed 15. Another company, Medivet Group, came in ninth with 8 acquisitions.

Interestingly, both of these companies were started by the same founder, August Equity, which invests in service-oriented companies in high-growth sectors of the UK mid-market including healthcare, education, business services and technology. The rapid growth and highly acquisitive business model of IVC and VetPartners are illustrative of a dominant trend in the sector: the influence of private equity. Since IVC was formed in 2011 and VetPartners in 2015, their expansion has been consistent, rapid and lucrative.

IVC has expanded across 10 European countries, with over 1,300 clinics and an online pharmacy. In 2014, it was acquired by Summit Partners, before being sold on again to EQT, which merged the group with Swedish firm Evidinsa. In 2018, it was reported that IVC would be put up for sale again, with the asking price said to be £1.5 billion.

IVC’s latest accounts, for the year ended September 30 2019, show the group generating turnover of over £474 million, with its gross profit coming in at over £196 million for the year.

VetPartners, meanwhile, has grown to be one of the sector’s biggest groups in just a few short years, with over 130 practices and European expansion underway. In 2018, it was acquired by BC Partners in a deal valued at £700 million, with Ares Management committing £565 million in financing for the acquisition.

In its most recent accounts, for the year ended June 30 2019, the group generated revenue of over £261 million, more than double the year prior, with gross profit standing at £197.3 million.

In this insight we’ll examine the reasons behind this high level of consolidation, as well as assessing what the impact of the COVID-19 pandemic will be on the trend and whether acquisition sprees by consolidators indicate that this is a sector for acquisitive parties to look at.

Why is there so much consolidation?

At first glance, the veterinary care sector may seem an odd contender for such widespread market activity, but there are numerous factors that have contributed. We’ve already outlined the considerable impact of private equity on M&A in the sector, but why are these firms taking such an interest in the sector?

An analysis of the veterinary sector in the USA, which has seen a similar trend of consolidation over a longer period than the UK, revealed that equity firms primarily acquire veterinary practices in order to grow through acquisitions and generate a considerable return on investment (ROI) when they inevitably look to sell them on.

Among the factors that make veterinary practices so attractive to equity firms is that they are typically resilient in the face of changes in the economy (after all, people will usually still seek treatment should their family pet become ill), while many independent operators will usually have an existing, reliable customer-base and a solid reputation.

Big acquirers, then, will seek to tap into this reliability and leverage it to boost profit margins. Some veterinary practitioners have noted that, after their practice was acquired by a bigger firm, it became more driven by revenue. This is illustrated by IVC, which saw its revenue double from £76 million to £184 million in two years under the ownership of Summit Partners.

Higher revenues at newly acquired practices will generate profits. These profits will then enable further acquisitions, allowing the process to repeat and ultimately generating a far higher resale value.

Why are operators keen to sell?

The issue of why independent practitioners are seemingly so ready to sell up is perhaps more complex. After all, with an increased focus on generating revenue, it might be reasonable to feel that the actual care provided might suffer as a result.

The primary reasons are, of course, financial. Quite simply, many independent owners have limited access to capital and may only be able to access secured loans at high interest rates. Furthermore, as younger vets enter the sector, the issue of student debt becomes more apparent, with anyone who began their veterinary studies after 2011 likely to have incurred debts of around £9,000 per year.

In both instances, the pull of private investment could prove particularly appealing.

But there are further benefits to being part of a bigger group. Being part of IVC or VetPartners, for instance, will provide a vet with greater purchasing power for drugs and equipment, whilst also offering support in areas such as administration, marketing, management and even data regulation compliance.

While this may result in a somewhat reduced degree of operational independence, many will value the security and convenience it offers.

Many vets surgeries will have impeccable professional standards and a fierce sense of independence. However, if a group is able to show that the practice would be better off as part of it and would be able to maintain its identity, the business might be far more open to an acquisition than it would initially seem.

Furthermore, as we’ll discuss in the next section, the COVID-19 pandemic has raised many regulatory and operational complications that some operators will feel they could deal with better as part of a centrally-managed group.

The impact of COVID-19

While, as we mentioned earlier, veterinary practices have traditionally been resilient against economic downturns, they haven’t been immune from the impact of the COVID-19 pandemic.

According to the Royal College of Veterinary Surgeons, veterinary practices saw turnover fall on average between 51 per cent and 75 per cent at the height of the pandemic, with a reduction in caseloads.

Veterinary surgeries were significantly impacted by lockdown measures (which could, again, ultimately lead to more acquisition opportunities and consolidation) as routine appointments were banned, while only vets and nurses working with farm animals were classified as “key workers”.

While a fall in turnover may discourage investment and slow the pace of acquisitions and consolidation in the short term, the pandemic may ultimately serve to accelerate consolidation within the UK veterinary sector.

With a second wave still a real possibility and the UK now confirmed to be in its first economic recession since 2009, many veterinary practices that have remained independent until now may start to see the benefit of being part of a larger group.

For one, there’s the aforementioned economic security provided by being part of a bigger company, which could prove very attractive to some independent operators should the coronavirus crisis continue. Safeguarding jobs is a universal concern.

Secondly, COVID-19 has prompted a huge increase in regulation and red tape, from personal protective equipment (PPE) to rules around social distancing (not to mention the further equipment required to enforce it). Being part of a group with centralised policy and teams dedicated to implementing government guidelines would save many practices a huge workload that they would otherwise have to take on themselves.

Being part of a centralised group during COVID-19 will also have enabled many to adjust quickly and more efficiently to the forced streamlining of booking systems and services as well as updating their practice management technology. A large group will have these things ready to roll out to any newly acquired surgeries, again, sparing them a time-consuming workload.

Is there room for new acquisitive players?

According to a recent estimate, the veterinary sector’s four biggest groups, IVC Evidensia, Mars Petcare, CVS Group and VetPartners own around 72 per cent of vet practices in the UK. This may seem like a huge market share, one that would potentially debilitate new players breaking in, but there are important considerations.

Firstly, consolidation has been a trend within the veterinary sector since 1999, when a law barring company ownership of veterinary surgeries was overturned. Secondly, both IVC and VetPartners are major players that have emerged well within the last ten years. These factors go to show that consolidation has happened at a steady pace and that new groups have been able to achieve significant growth.

What’s more, with developments in the sector closely reflecting similar trends that have already occurred in the USA, it is important to point out that there are several mid-sized groups performing well in the US veterinary sector, such as VetCor, Pathway Vet Alliance and National Veterinary Associates (NVA).

The case of VetPartners CEO Jo Malone perhaps best illustrates the opportunities in the veterinary sector for enterprising parties who pursue growth through acquisition. Just five years ago, Malone was a partner and joint-manager at a small, independent practice in York.

Unwilling to sell the York practice to a bigger chain, Malone and some of her fellow partners formed VetPartners, quickly joining forces with August Equity and moving to acquire further practices in Newcastle and Lincoln.

Three years later, August Equity sold the group to BC Partners for £720 million, the biggest ever deal in the UK veterinary sector. With five years of solid acquisitions under VetPartners’ belt, Malone is now listed at Companies House as the director of 120 businesses.

The rapid rise of Malone and VetPartners goes to show that a company that combines a passion for veterinary care with a solid, acquisition-based business model and the necessary funding from a trustworthy partner can perform exceptionally well in the sector, despite the seeming dominance of pre-established market players.

Furthermore, with independent practices still making up the vast majority of veterinary surgeries in mainland Europe, the scope for groups that gain a foothold in the UK to expand internationally seems to be extremely promising.

Conclusion

Becoming an acquisitive force in the veterinary sector may require a little more than the pure business acumen that is required to succeed in other industries (although you’ll need that business savvy too, of course).

But, for parties that are able to wield the right combination of veterinary experience and business nous, and that have the seed capital or backing to set their plans in motion, entering the sector could prove highly lucrative.

Furthermore, the exceptional circumstances of COVID-19 may have prompted even some of the most proudly independent surgeries to consider whether they would be more secure as part of a group.

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