Amid Covetrus IPO, CD&R’s Vets First Choice stake valued at ~5x investment

  • CD&R did not sell any shares in connection with Covetrus IPO
  • CD&R has invested $100 mln in Vets First Choice
  • Vets First Choice/Covetrus underscores CD&R partnership-strategy and firm’s increasing focus on growth-oriented end of market

In connection with Friday’s public debut of Covetrus, Clayton, Dubilier & Rice’s stake in Vets First Choice is worth 4.8x its investment to date in the veterinary-software company, a document circulated to investors shows.

Covetrus, created through the recently completed merger of CD&R-backed Vets First Choice and the animal-health business spun off from Henry Schein, began trading Friday on Nasdaq.

The on-paper return is based on the Portland, Maine, company’s opening price of $43.05 a share, the document said.

The shares closed Feb. 11 down 8.4 percent at $37.56.

Six-month lockup

Subject to a six-month lockup, CD&R did not sell any shares in connection with the IPO, the document shows. Fund IX and its affiliates own some 10 percent of the new public company, the document said.

For CD&R, which in April 2017 raised $9.4 billion for Fund X — its largest — Vets First Choice/Covetrus is emblematic of a growing theme.

While its partnership strategy formalized about a decade ago, CD&R is increasingly teaming up with growth companies using a similar playbook.

Partnership transactions refer to those in which the seller remains a significant owner alongside CD&R.

Historically, CD&R was known as an investor in large established companies, and more specifically, it tended to focus on distribution-oriented businesses.

While Vets First Choice is now part of a large enterprise that generated about $4 billion in combined 2018 revenue, the founder-run company was not yet profitable at the the time of CD&R’s initial 2015 investment, a person with knowledge of the company said.

In other words, the firm hasn’t only broadened its investment mandate from an industry perspective. CD&R has built on its partnership strategy, increasingly teaming up with entrepreneurs to support the next phase of growth in innovative companies earlier in their life cycles.

To date, CD&R has invested $100 million in Vet’s First Choice, according to the document.

The firm through its initial growth investment injected $40 million in the company in July 2015, just five years after it was founded, the document said.

CD&R in July 2017 invested an additional $60 million, it said, as part of a $223 million financing that it led alongside Hillhouse Capital Group, with participation from other investors.

Vets First Choice was co-founded in 2010 by David Shaw, who will serve as chairman and CEO of Covetrus.

The company helps veterinarians improve animal health through technology, offering software that improves prescription compliance, reduces inventory and drives client engagement. Its geographic presence spans 25 countries, serving 90 percent of U.S. veterinary practices.

While Vets First Choice/Covetrus is among CD&R’s earlier growth-oriented investments in healthcare, 2018 saw an acceleration of transactions that can be characterized in a similar manner.

CD&R in August bought a 55 percent stake in naviHealth, partnering with existing owner Cardinal Health. Terms weren’t disclosed, but sources familiar with the matter previously told Buyouts the deal was valued around $1.2 billion.

Like Vets First Choice, CD&R’s investment in naviHealth came earlier on in the company’s life cycle. The young but high-growth company works with insurers, doctor groups and hospitals, providing software to manage care for patients in post-acute-care settings.

SmileDirectClub

On the heels of naviHealth, CD&R in October led a financing round in SmileDirectClub, which delivers custom-fitted invisible aligner orthodontics to consumers’ homes without requiring visits to dental or orthodontic clinics. The fundraising valued the teledentistry company at $3.2 billion.

SmileDirectClub, founded only about five years ago, was largely self-funded through Camelot Venture Group prior to the equity private placement.

Another example is CD&R’s October 2016 formation of Agilon Health through the simultaneous acquisition and merger of Primary Provider Management and Cyber-Pro System. The company helps equip physicians with tools to transition to value-based care, from the traditional fee-for-service model of reimbursement.

In all four examples, CD&R is investing in growth companies that provide technology or services that disrupt or improve how healthcare services have traditionally been delivered and/or funded.

Action Item: Reach CD&R’s New York office at +1 212-407-5200