You may have heard industry chatter about the eventual Initial Public Offering (IPO) of the first veterinary services business, likely by NVA or Vetcor. This chatter was extensive in 2021 during the market highs but has subsided since mid-2022 when the stock market softened and interest rates have risen.
For some background, there has not been a publicly traded veterinary services business since Mars purchased VCA in 2017, thus turning VCA into a private company. Let’s talk more about IPOs and the impact they will have on the veterinary space.
What is an IPO and why go public?
For starters, an IPO is when a large company lists itself publicly on a stock exchange (usually NYSE or NASDAQ), where each day there is a price of the stock that an individual or institution can purchase. There are several veterinary businesses that are public, but those are only diagnostic, pharmaceutical, and distribution businesses like IDEXX, Zoetis and Elanco (Covetrus was public but was taken private by a Private Equity firm). On the other hand, most of the veterinary services companies you see today are private businesses owned by private equity or family offices.
Veterinary services businesses will do an IPO or “go public” when they reach a size where there are no buyers big enough to afford them. Businesses like NVA, Thrive (formerly Pathway), Vector and PetVet are useful examples as they’re reaching a size where their business values are multi-billions of dollars. Private equity firms don’t want to spend that much money to keep those businesses private, so the existing owners will begin to ‘exit’ by issuing shares to the public.
So why does a multi-billion dollar business like NVA or Thrive need more capital in the first place? The first step in the math equation is understanding that these businesses grow by acquiring hospitals:
- To purchase a quality veterinary practice, valuations had been 12 to 18x profits in 2021 and remain high at 8-13x profits today.
- Large corporate groups like NVA or Thrive can borrow about 6x profits to purchase that hospital.
- With that in mind, corporate groups other three to 7x of profits from a) cash flow generated by their business, b) new equity capital or c) the sellers accepting TopCo equity in the buyer as part of the purchase price.
Large veterinary businesses generate strong cash flow, but they need to pay interest on all their debt. Meanwhile, the pace of acquisition remains strong, so they also need new equity every so often to support rapid growth. JAB, the family office that owns NVA, has been helping fund its purchase of Compassion First and now Ethos and Sage through additional equity.
At some point, businesses become too big for private equity to continue funding them. Let’s look at a hypothetical example:
A veterinary services business has 600 locations at an average revenue of $3.5 million per location (or $2.1 billion in total revenue), with 21 percent hospital margins and 17 percent corporate margins. That’s almost $350+ million in EBITDA. If we were to value their business at 20x EBITDA, that is a value of nearly $7 billion.
This begs the question: How does a private equity firm finance or an $7 billion veterinary business? We know that they can borrow about 6x EBITDA ($2.1 billion), but then the PE firms also need another $4.9 billion in equity. The prior owner and management might roll over some equity to reduce the amount, but regardless, the price tag is too big for the PE firm to afford the business.
We also know that the largest private equity funds are anywhere from $20 to $25 billion in capital. If they average 10 to 15 deals in their fund, that means they are writing $2 billion checks – from the $4.9 billion needed in the example above.
The bottom line is, the ability for PE to continue to buy the businesses becomes more challenging as consolidators continue to grow. Once the consolidator becomes too big, the current investors of the business will create an alternative to exit their investments: the IPO.
What happens when veterinary services companies go public?
News about NVA’s potential IPO started in early-to-mid 2021, however, with the market turmoil, we now believe an IPO will not occur until late 2024 or even 2025. With the stocks of growth companies declining significantly in the early 2022—along with inflation, interest rates hikes, and a war in Ukraine—there is uncertainty in the market, which makes an IPO a risky move. Within the veterinary industry in particular, it’s difficult to top the pace of stellar growth it experienced in 2020 and 2021. Public stocks in the veterinary sector, such as Zoetis and IDEXX, are feeling this impact as their stock prices have declined materially in 2022 and early 2023. We believe an IPO will not occur until the Federal Reserve moves interest rates down from their current 5% level to under 4% (which is likely, at the earliest, late 2024)
This brings us to another question: Is an IPO ‘good’ for the market? Will it help the valuations of individual practices? The answer is as clear as mud. In reality, it depends on a number of factors.
When veterinary services businesses go public, it will provide a daily measure on the valuation of the industry. Especially when there are two or three public companies, the valuations (multiples of EBITDA that the stocks trade at) will vary, and the markets will inform the world of the range of values for the largest veterinary services businesses. Will the public markets value these businesses more than what the current, private recapitalizations are valuing them? Or will these businesses be valued similarly to the values that PE firms pay for recapitalizations? Only time will tell.
What is certain is this: the public market values of consolidators will set a true benchmark for valuation; it will influence the valuations that PE firms pay for corporate groups.
Once there are a few publicly traded consolidators in the market, we expect the number of independent companies to decline. There are currently more than 30 PE-backed consolidators today, with consolidators also beginning to buy each other (Recent example: NVA purchasing Sage and Ethos). When public companies have easier access to debt and equity capital, this trend will accelerate, and the number of independent companies will decline.
How quickly will this all happen? While the exact timing is uncertain, our team believes there will be two to four public companies by year end 2025, which will kick off larger consolidators buying the smaller ones through 2027.
Needless to say, this movement will not be ideal for the individual practice owner, especially the smaller practice owner. Today, there are a handful of buyers for a $1.5 million, 3-DVM practice. However, as the number of consolidators diminishes and the ones remaining grow bigger, their interest in smaller practices will wane.
As consolidators grow in size and profitability, they will need to start accessing the public stock market in order to raise capital and fund their continual growth. IPOs are expected to occur in late 2024 or in 2025 (assuming the world economy settles down). These IPOs will change the market as we know it: public consolidators will purchase the smaller players and the number of independent companies will start to decline.
Ackerman Group specializes in facilitating veterinary practice sales to the corporate market. Our unique access to real-time market changes, deep understanding of buyers and their strategies, and our experience managing the intricacies of the transaction process makes Ackerman Group the preferred broker among practice owners. We work on your behalf to help you secure the best price, best fit, and best terms so you can sell your veterinary practice successfully.