Consolidation meets regulation in the veterinary clinics market
As animal health becomes big business in Europe and the US, regulators are taking a closer interest in the consolidation activity taking place, with the ramifications beginning to be felt across investment and M&A in the sector.
While the global veterinary market is an attractive one, regulatory developments and challenging financial markets mean investors and operators have to adapt to ensure they prosper.
UK regulators move in
As the animal health business grows, the corporatization of the veterinary market through mergers and acquisitions (M&A) has become a discussion point over the past decade and is something that is increasingly catching the attention of regulators as markets consolidate in the hands of a few.
Regulation is now playing a growing role in the global veterinary market and influencing M&A, especially in Europe – most prominently in the UK and France. The US market is not immune either, with the Federal Trade Commission (FTC) imposing restrictions on the activities of Mars and JAB especially.
In the UK, the Competitions and Markets Authority (CMA) announced a ‘market review’ in early September 2023, which in March this year developed into a full-blown Market Investigation. As a forerunner to this, the CMA unpicked a number of historic transactions by consolidators, including veterinary services providers Medivet and IVC Evidensia, which ultimately led to the disposal of practices by them.
Every cloud has a silver lining, however, as some of these deals resulted in new entrants into the market; most notably PE firm Perwyn acquiring 10 practices and launching the brand Kin Vet Community. The Market Investigation may lead to further sector disposals or other remedies and concern over the outcome of the review led public markets investors to react negatively, with CVS Group Plc declining around 30% on the day of the CMA’s announcement.
The French perspective
In France, the Ordre National des Vétérinaires (ONV) is resisting the entry of large foreign companies into the domestic veterinary services market. The ONV has argued that these companies do not comply with the rules of the profession and threaten the independence of veterinarians.
The Conseil d’État, the highest administrative court in France, ruled in favor of the ONV in July 2023 and decided that the ONV can refuse to register a veterinary company if its statutes or agreements are not in line with the law or the profession’s ethical standards. Some veterinary corporates are having to reconsider both their legal holding structures and appetite for M&A in France while the new guidance becomes clear.
Furthermore, 2 major private equity deals have been pulled in France as a direct result of this development. While some pause, others who conform to the structuring rules are pressing on – the veterinary clinic network Mon Véto is acquiring at a rapid pace with the financial support of Paris-based investor firm Ardian.
Other markets where consolidation is less progressed haven’t attracted regulatory scrutiny and have remained active, such as Belgium with recent deals for veterinary networks Nesto and BeVet. In Italy, veterinary care player BluVet attempted to find a new owner in late 2023 but put its process on pause after lack of interest because of deal dynamics and elevated price expectations.
As of March, veterinary clinic provider Animalia was moving into the final phases of securing a minority investor, albeit the process narrowed quickly to include only the most committed who are willing to ‘look the other way’ on a highly adjusted selling EBITDA and a complex deal structure.
Unavets, which claims to be one of the largest veterinary health groups in the Iberian Peninsula, kicked off its process to find a new financial sponsors backer in February and has received strong initial interest with several PE firms stepping up their pursuit ahead of March’s bid deadline.
Appetite is positive given a strong management team, integrated platform and broad ecosystem of operations expanding the addressable market. A key question for investors in the European markets will be whether domestic competition regulators will take note of the UK’s CMA work as their more fragmented markets start to rapidly consolidate too.
Private equity comeback
One thing that has come out of the recent developments in Europe is the return to form of private equity over trade – perhaps a reflection of a moderation of valuation in the current high-interest environment and lesser competition from trade as balance sheets are repaired after years of aggressive deal making.
The entrance of new PE backers is positive for the sector as it broadens the owner base and future buyers for other smaller platforms, while ultimately reaffirming the strong animal health investment thesis.
Developments in the US
In the US market, M&A activity has slowed notably as interest rates bite on highly levered businesses, and investors seek proof that these businesses are more than just Pac-Man acquirers of assets.
The high valuations of the past are leading to investors waiting until valuations rebound. In recent months, data from the American Veterinary Medical Association (AVMA) has highlighted declining visit numbers across its members as the COVID bubble sees the puppy/kitten cohort move into adulthood, with less veterinary input required. Investors are now focusing on operational excellence and organic like-for-like growth programs to counter declining volumes.
Coping with challenges
In recent years, with a more challenging M&A environment, a notable trend has seen investors increasingly looking to enter the sector by investing in or acquiring brand-new hospitals in prime locations. Vet services start-up Bond Vet is an example of such a model that Lincoln International supported. This allows for fresh branding of a single name in an environment that feels sufficiently high caliber for the pet owner’s furry friend, which is beneficial for marketing as well as attracting and retaining customers and staffing.
Marketing a single-branded hospital chain is seen as easier as the message is consistent across locations and allows for increased awareness, attracting a larger customer base and supporting growth objectives. Additionally, it is more efficient to move customers as well as staff to different locations since all the medical information is saved in one system and removes a potential delay in transferring records that could impact care, allowing support for different staffing models based on objectives and talent needs.
The European veterinary clinics market is estimated to be worth over €20.2 billion ($22.1B) and growing at 7 to 8% according to L.E.K. Consulting, with the drivers well understood: the humanization of pet care; a growing post-COVID population of cats and dogs; an aging pet cohort; and technological advances in care and treatment.
In comparison, the US market is valued at $21 billion (€19.2B) and growing at 6.3% yearly, according to Market Research 365.
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