Profit from Britain's animal lovers
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Associate Editor
David Stevenson Feb 19, 2010
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Vets are rarely famous. But most people can name one: James Herriot. As the author of the best-selling book All Creatures Great and Small, he became a household name for millions of readers. Later, thanks to a TV series, he became Yorkshire's favourite veterinarian. Yet the mainstay of his business was actually the local agricultural community. Whenever there was a problem out on a remote farm, individual pet owners generally had to play second fiddle.
But the likes of Herriot could soon be "a thing of the past", says Louise Gray in The Daily Telegraph. These days, "all [vets'] time is taken up treating sick cats and dogs because it pays better". Philip Lowe at the University of Newcastle's Centre for Rural Economy has found that the time vets in private practice spent treating animals used for food halved between 1998 and 2006. Financially, this makes good sense, says Lowe. As most vets run their own businesses, they can generate more income from local pet owners than from remote farmers.
Indeed, "pets are big business in the UK", points out John Miles at Gocompare.com. "According to a recent census from animal welfare charity the Blue Cross, a massive 39% of the population owns either a dog or a cat." And pet ownership may be much wider than previously thought, says a study published this month by Bristol University. "UK cat and dog numbers were last estimated in a scientific peer-reviewed journal in 1989 at 6.2 million and 6.4 million respectively," says the BBC. "But Bristol's Department of Clinical Veterinary Science believes today's populations are likely to be about 10.3 million and 10.5 million."
Even at wholesale prices (before a surgery's mark up), last year the UK animal medicines industry was worth more than £500m, says the National Office of Animal Health. Trips to the vet cost the average cat and dog owner over £240 a year, says Gocompare.com, part of an overall cost per animal of £677.
And the recession hasn't made serious inroads into the number of vet visits. Owners have "an emotional attachment to their pets", says James Crux in Growth Company Investor. "Although more prudent pet owners might stop paying for non-essential treatment or vaccines when the economy turns down, they'll always tend to take their beloved animal to the vet if it falls ill."
Private-equity managers certainly seem to agree. Pets at Home, the country's largest pet food and equipment supplier, was recently valued by owner Bridgepoint Capital at £700m. Yet four private-equity groups placed initial bids higher than £800m. Finally, last month New York-based private-equity mogul Kohlberg Kravis Roberts agreed to buy the business for £955bn. "We're enthusiastic about the significant further potential for Pets at Home to grow," says the firm's John Pfeffer.
Demographic factors are also supporting the sector. Dogs and cats are most commonly owned by those aged 55 or above, according to the Blue Cross pet census. So as the average age of Britain's population rises, the country is set to see more growth in moggy and pooch numbers. And that means even more visits to the vet.
The industry is still highly fragmented – typically lots of small practices cater solely for their local areas – and ripe for consolidation. That process has now started. We look below at Britain's leading animal care provider.
The best bet in the sector
Veterinary practices' buyer CVS Group (LSE: CVSG) is "pursuing a highly successful, high growth, buy-and-build strategy in a resilient market", says James Crux in Growth Company Investor.
"Younger vets now are less inclined to buy into partnerships", says CVS finance director Paul Coxon. "And with the 50-something vets looking to secure their nest egg, that means their natural exit route is no longer there. We wait, and they come to us." CVS is the biggest player in the British veterinary business, having so far snapped up around 170 practices. But as this equates to just 7%-8% of the small animal sector, there's plenty of scope for more growth.
CVS pays cash for its acquisitions and most vets are keen to stay on post-sale. "We strip out the inefficiencies", says Coxon, by absorbing HR, marketing, payroll and purchasing into the company's "central function". That alone "can put 7%-10% on the bottom line solely by buying products at better prices". In short, CVS can deliver "a significant profit enhancement from year one". At 200p, the firm has a market value of £103m. The forecast p/e of is a cheap-looking 10.8 for the 12 months to June 2011.
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