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Private-equity firms are disrupting the once-bucolic world of James Herriot
THE MARKET town of Thirsk, two-and-a-half hours by rail north of London, has become a magnet for fans of James Herriot, the fictionalised Yorkshire vet, just as London’s Kings Cross, from where the train leaves, is for Harry Potter lovers. Herriot, modelled on the life of his creator, the late vet-turned-author Alf Wight, was made world famous in the 1970s by a series of books, films and a television series. The surgery on which the books were based has been turned into a museum displaying its original 1940s apothecary and a breakfast table on which?Wight sometimes performed surgery. The “wild panorama of tumbling fells and peaks”, where in the stories Herriot spent as much time wrangling with the farmers as he did with their animals, is as striking as ever.
But some of the town’s folk are in high dudgeon over what they see as a betrayal of Herriot’s legacy of small-town professional devotion. In 2017 the Skeldale veterinary practice, a partnership once run by?Wight and Donald Sinclair (aka Siegfried Farnon), sold out to Medivet, a chain of more than 260 vet practices backed by a London private-equity firm, Inflexion. Chris Jeffery, a breeder of whitebred shorthorn cattle (“that’s not because they eat white bread”), is among those who are fuming. “How much more traditional can you get than James Herriot’s practice?” he exclaims. “It’s been sold down the river.”
Corporations like Medivet, a breed once as rare as Mr Jeffery’s cattle, are now riding roughshod across the British veterinary landscape, as they are in America and the rest of Europe. Vet businesses provide an opportunity for cash-rich private-equity firms to roll up a plethora of small, relatively inexpensive operations into bigger firms, sell them on or do initial public offerings, hopefully for a tidy return. According to Bain, a consultancy, this “buy-and-build” strategy, using businesses ranging from vets to hair salons to suppliers for tattoo parlours, is the hottest trend in private equity, accounting for one in five transactions globally last year.
From the point of view of private equity, veterinary deals are like a food chain, structured around EBITDA, an acronym for profits that not many vets know. In Britain and America independent veterinary practitioners used to buy a share in a business by paying, say, two times annual EBITDA, which they could then sell on at retirement—usually to younger colleagues. Now bigger vet firms, with plenty of venture-capital firepower behind them, buy the partners out for, say, five to eight times EBITDA. Once the acquiring corporation is big enough it, too, can be sold, probably for multiples of EBITDA in the mid-teens. The deals are underpinned by lots of debt. But as long as there is an end buyer, it is a tasty business.
Vets’ practices have attractive characteristics, says Hugh MacArthur, head of private equity at Bain. They are a mixture of steady earnings (pets still get ill during recessions), high levels of fragmentation providing scope for additional deals (in America, just over $31bn of the $38bn vet market remains individually owned), low risk of digital disruption, and shifting demography (many elderly vets are keen to cash out). Above all, people are pampering their pets like children. Recent deals highlight the trend. In America Oak Hill Capital and KKR, two private-equity groups, have acquired large chains of animal hospitals. In Europe EQT, a Swedish buy-out group, last month sold a stake in its vet group, IVC, valuing it at €3bn ($3.4bn).
Keeping the deal machine turning is the prospect of selling out to bigger firms, some of whom are diversifying from human beings to animals. JAB, which owns Krispy Kreme, last month bought a stake in a chain of pet hospitals worth $1.2bn. Mars is gobbling up vets’ businesses much as people devour its chocolate, adding to its $9.1bn purchase in 2017 of VCA, an 800-clinic chain.
Yet handling animals is famously unpredictable. As Herriot knew all too well, sometimes being a vet can be as unappealing as the back end of a cow. Beyond the hefty multiples, the business is not as healthy as it seems. Britain, where as many as half of the country’s 5,000 veterinary practices are in the hands of corporations, reveals the risks of overcrowding. CVS, the biggest listed vet chain, cast a chill over the industry in January by warning that staff shortages and a poor recent spate of acquisitions would hit profits.
In America a shortage of vets and the rising cost of temporary workers are taking their toll, too, making it harder for private-equity-backed chains to make money. Partly this is because young vets have high student debts; many drop out of the profession because the pay is not good enough. They are also demoralised; suicide rates among vets in America are at least twice the national average, and in Britain, almost four times.
In Thirsk Julian Norton, once a junior partner at Skeldale and, like Herriot, now a television celebrity (“The Yorkshire Vet”), was bought out by Medivet but joined a new firm nearby. He worries about three aspects of the new veterinary business model. First is the amount of debt: “I don’t think I’d ever want to borrow that sort of money. I sleep little enough as it is.” Second is the risk for customers that with dwindling local competition, the chains can ramp up prices to try to pay off their debts quickly. And third is the expectation of relentlessly rising profit over the long run. “It’s not that easy to make money out of emptying anal glands.”
Barbarians at the five-bar gate
Yet overall, the economic logic is convincing. For investors “buy and build” strategies provide an alternative to parts of the capital markets where values are stretched. As private-equity firms support the consolidation of smaller vet practices, the latter’s productivity should improve. Bigger firms can provide better salaries and more support to vets. Flux, moreover, has long been a feature of the vet business. As Farnon told Herriot on his first day on the job: “There’s very little profit in it so far, but if we stick in for a few years, I’m confident we will have a good business.” The fee at the time: three and sixpenny.
Correction (March 8th 2019): A previous version of this piece misspelled Alf Wight’s name as Alf White. This has been amended throughout.?