Los Angeles animal health care company VCA Antech plans to buy local competitor Pet DRx for $41.25 million.
Publicly traded VCA is the largest veterinary hospital operator in the country, with 492 facilities and $1.3 billion in revenue last year. Brentwood-based Pet DRx — which is in the process of being delisted from the Nasdaq Capital Market — operates 23 hospitals in California and had a net loss of more than $30 million on $64 million in revenue in 2009.
Under the terms of the cash deal, VCA will first pay down Pet DRx’s roughly $28.5 million in debt, leaving a purchase price of about 34 cents to 36 cents per common share.
That price — about 0.65 times Pet DRx’s 2009 revenue — is reflective of "some of the issues with Pet DRx both operationally, and that the company was in the process of being delisted," said Morgan Keegan & Co. analyst Robert Mains. He said VCA typically acquires companies for about 1 time annual revenue.
In terms of operations, Pet DRx has struggled during an industrywide downturn that's now in its third year, Mains said. As consumers have cut back on discretionary spending for things like pet health, animal hospital operators have faced lower revenue and tighter margins. In a research note issued today, Jefferies & Co. analyst Arthur Henderson said that economic environment is "driving increased interest among hospital operators to sell their businesses."
It's also helped hold Pet DRx’s stock price below the $1 minimum threshold of the Nasdaq Capital Market for more than a year, pushing the market to pursue the company’s delisting in March.
"In these challenging economic times, I am pleased that the value of our business was recognized by a leader in our space for the benefit of all of our shareholders," said Pet DRx CEO Gene Burleson in a statement. "This combination will also provide an expanded platform of services for our patient sand enhanced opportunities for our employees."
It's unclear what the acquisition means for Pet DRx's corporate office. A spokesman for the company was not immediately available for comment Wednesday morning.
In the two-part transaction, VCA will first acquire a majority of shares of the company under a stock purchase agreement. Then it will buy the remaining issued and outstanding shares pursuant to a merger agreement. Much of the deal has already received board and shareholder approval, according to the news release announcing the acquisition, and Mains expects it to close some time next quarter.
Jefferies expects the deal will add 4 cents per share to VCA’s 2011 fiscal year earnings.