In 1987, VCA Animal Hospitals acquired its first independently owned companion animal clinic. It sparked the beginning of a consolidation process for corporate-owned US veterinary practices. Freddie Evans, junior associate, and Adam Scott, senior partner, of Mansfield Advisors consider the prospects for further consolidation of the veterinary market in the US
Corporate consolidation in the US veterinary sector has picked up pace since the VCA deal. By 2017, just over 10% of the approximately 30,000 practice market had consolidated, and the corporate share of the market now represents around 36% gauged by the number of practices. Corporates tend to take over larger practices, however, so the true private market share of activity is likely to be over 40%.
Specialist hospitals are a slight exception, where the approximately 1,500 specialist hospitals have received the most intense interest and competition from corporates. Consolidation here stands closer to 75% by volume.
The corporate share of market value is likely to be greater than the share of activity as they own practices and hospitals that will carry out higher value operations, including referrals.
There are now around 50 consolidators across the US. Compare that to the UK and we see a different picture in market structure, greater consolidation and fewer players.
Since non-veterinarian ownership of practices has been allowed in the UK, corporates have accelerated to dominate the market and are moving on to other European markets as well.
State of the market
There is no formal registration of all US vet practices, but Mansfield Advisors estimate it to be in the region of 32,000‒34,000 practices. Veterinarian numbers are, however, recorded. The American Veterinary Medical Association has around 124,000 registered vets, the majority of which (67%) work in companion animal practices, and it’s these practices, along with some mixed practices (4% of vets), that are the main target for consolidators.
Large practices and specialist hospitals are most in demand and represent the highest priority targets for corporates. A long tail of small one or two vet practices are of less interest to consolidators.
Before we go any further, it may be helpful to clear up some terminology. Companion animal practices are the equivalent of small animal practices in the UK but can include equine. Standalone equine practices remain, as they do in the UK.
Large or farm animal vets are also known as food animal vets, and mixed practice remains the same.
At the JP Morgan Healthcare Conference in January 2023, we saw Kristin Peck of Zoetis, the leading animal health company, present results of their market research to show the extent of the sustainability of the market during an economic downturn. Key findings revealed that 86% of owners would pay whatever it takes if their pet needed extensive veterinary care and that pet spend is not cut even when faced with a 20% decrease in total budget. As well as these spending habits, demand for veterinary services is rising through growth in pet numbers, and growth in the number of procedures available to the veterinary market as it follows human medicine advancements.
Covid led to a boom in pet ownership, fuelling more demand for vets in coming years. A 2021 American Veterinary Medical Association survey reported as much as a 16% increase in the number of dogs and 6% increase in the number of cats since 2016. As a result of this growth in demand ‒ and some price rises ‒ practices have reported revenue increases of as much as 20% in the last year.
This supports the idea that veterinary is a resilient sector to invest in, and reinforces the recent trend of consolidation picking up pace as interest rises. The good news is that much of the increased demand for veterinary services will only be seen in practices from 2025 onwards as new pets taken on over the pandemic enter a stage of life where greater intervention is required.
The largest corporate is VIP Petcare which is owned by publicly listed PetIQ, an animal wellness company. Mars follows closely through three brands; VCA, Banfield and BluePearl. Collectively these brands have over 2,200 practices. The largest groups attract substantial private equity interest through the likes of JAB Investors, which holds National Veterinary Associates (NVA). The group was particularly active in 2022 with bolt-ons of SAGE Veterinary Centers, Ethos Veterinary Health. Others include KKR (PetVet Care Centers), TSG Consumer Partners (Thrive Pet Healthcare, formerly Pathway Vet Alliance) and Shore Capital Partners (Mission Veterinary Partners).
Many of the smaller consolidators remain founder or vet owned, such as Lakefield Veterinary Group and WellHaven Pet Health. These may be candidates for rolling up into the larger groups, though would likely come at a premium. Across the border in Canada we see a European player IVC Evidensia, which has acquired VetStrategy (owner of Groupe Vétérinaire Daubigny) with 270 practices. Nordic Capital entered the US veterinary market with the acquisition of United Veterinary Care, following its successful 2018 exit from Anicura to Mars in Europe. Some of the other European players are yet to break in over the pond.
Why is consolidation not higher?
We may question why, despite starting global veterinary consolidation in 1987, the US is less consolidated than other markets such as the UK, which is currently around 55‒60% consolidated. There are a number of contributing factors, starting with the sheer size of the US.
The US has around six times more vet practices than the UK, and the geographical distances in the US can have a slowing effect. Furthermore, the different state laws can take time to navigate. Growth rates have also contributed. During the 1990s and 2000s steady consolidation took place, but there was also steady growth in the total number of practices, doubling from roughly 16,000 practices in the 1990s. This watered down the consolidation effect so corporate share stayed at around 5%. The boom in corporate acquisitions in the late-2010s has seen consolidators make substantial ground.
It should be noted that there is legislation in many states restricting ‘corporate practice’ of medicine, however this does not hinder consolidators. Laws restrict ownership of veterinary practices to licensed veterinarians only, to prevent non-veterinarian influence on veterinary decisions. In some states without these restrictions, a licensed veterinarian must be on the premises.
To overcome this hurdle, corporates can gain effective ownership of practices through management services organisations (MSO). The MSO provides services for a fee and owns some non-restricted veterinary practice assets, while the restricted elements of the practice remain owned by the licensed professional. A slight variation is establishing an administrative services structure, whereby a corporate takes over the administrative side of a practice without taking over any assets, while the veterinarian maintains control of service provision.
The legislation does not appear to be a barrier to consolidation. Corporate presence is high in states where non-veterinarian ownership is restricted as seen in Figure Three.
More recently there have been some efforts to resist or limit consolidation both from the market and regulators. The Independent Veterinary Practitioners Association (IVPA) was founded in 2018 and offers members corporate type services – such as marketing materials, discounts on services like teleradiology and insurances, and medicines discounts – to help them compete more effectively.
While helping small independents compete, this is unlikely to hinder consolidation. Those practice owners looking to sell will not be fazed by such organisations.
From a regulatory perspective, the Federal Trade Commission (FTC) has started to show increased scrutiny of veterinary consolidation. At the more specialist end of the market, Mars and NVA have had acquisitions blocked.
In June 2022, NVA sold 11 of its 1,400 hospitals in an agreement with the FTC to allow the acquisitions of SAGE Veterinary Centers and Ethos Veterinary Health, and NVA must now notify and receive approval from the FTC prior to acquiring any speciality or emergency veterinary practice within 25 miles of an existing practice in certain states. It must also notify the FTC before any acquisitions within 25 miles of any existing sites throughout the remainder of the US.
Newcomers such as Rarebreed Veterinary Partners, United Veterinary Care, Veritas Veterinary Partners have been able to grow quickly due to these antitrust issues, snapping up assets others have been prevented from taking.
This type of intervention has also been seen in the UK, with the CMA stepping in during VetPartners acquisition of Goddard Veterinary Group’s 47 practices in 2022. VetPartners had to sell 11 practices, eight of which were bought by Linnaeus. Similarly CVS was blocked from acquiring Quality Pet Care (AKA The Vet), which owns eight practices.
Antitrust may become more of an issue for larger players as it narrows growth and exit opportunities, but it is of little concern for smaller consolidators which are unlikely to be affected and may benefit from the inability of larger groups to acquire. It is possible that this suppression of big players may lower the red-hot valuations that have been seen over recent years, but competition remains high amongst the smaller players.
Before the pace of consolidation picked up in the late-2010s, valuations of single good practices were typically 7‒8x EBITDA and specialist hospitals at 10‒12x. More recently the going rate is 8‒12x for practices and 12‒15x for hospitals, with some reports of as much as 18‒20x.
Larger chain acquisitions have higher valuations. For example, NVA (backed by German PE fund JAB) reportedly paid around 25x for both SAGE Veterinary Centers and Ethos Veterinary Health. This is not dissimilar to the picture in the UK, where CVC’s 2021 majority stake in Medivet was reported to be on a £1bn-plus valuation, at a multiple thought to be in the mid-20s. In 2021, Silver Lake Capital acquired a €3.5bn stake in IVC Evidensia with a €12.3bn valuation, a multiple in the low 30s based on £373m EBITDA (FY21 y/e 30 September).
The consolidation runway still has a way to go. We expect there to be a natural ceiling of around 50% of practices that are unattractive to corporates due to being sub-scale. However, this 50% of inaccessible practices likely account for only about 20% of the vets, so it is not a concerning limit. If consolidation continues at a similar rate of close to 1,000 practices a year, there is likely to be at least another five or more years of corporatisation of independent practices. There is also the opportunity for an investor to roll up some of the near 40 smaller consolidators to create a player that can compete with the likes of Mars and PetIQ.
We have identified a selection of assets that may come to be available for acquisition, the largest of which is Mission Veterinary Partners, which has been owned by Shore Capital Partners since 2017. A sale was explored in late-2021 but was never completed.
KKR has owned PetVet Care Centers since 2017 and may be looking to exit based on typical fund lifetimes. Similarly the likes of American Veterinary Group (Latticework Capital, 2015) and Encore Vet Group (North Castle Partners) have been held by their respective owners for a number of years.
These acquisitions present an attractive entry to the market through existing platforms, from which further consolidation can be pursued.
In conclusion, competition in the sector for high quality businesses is substantial, as shown by the multiples they command. The fundamentals of the market are strong with growing pet number and vet demand.
The thesis for vet roll-up in the US is strong and reflect those that exist in the UK. The current position of the market provides a great opportunity for both consolidation of independents and rolling up small corporates.
There is no time to delay if you want to get in on the action before it’s too late.