TSG Consumer closes deal for MSCP’s Pathway as vet care is deemed “essential business”

The $2.65 bn deal closes shortly after the government deems veterinary services "essential business", validating private equity's longtime belief that the sector is insulated from economic downturns.

TSG Consumer Partners has closed its majority acquisition of Pathway Vet Alliance, which after growing earnings tenfold under the backing Morgan Stanley Capital Partners is already showing the recession resilience of vet care in the early days of the covid-19 crisis.

Financial terms were not disclosed, however the transaction, signed about a month ago, was valued at approximately $2.65 billion, PE Hub reported in March. MSCP will retain a significant minority investment in Pathway alongside management. 

Over the last decade, medical care and wellness for pets has emerged as one of investors’ favorite multi-site segments, with Pathway and peers of all sizes considered by many to be a “forever” type of asset.

Very clear trends around the humanization of animals have led vet care to attract significant levels of private equity investment, however this is the first time we’ve seen this kind of government action substantiate the industry’s recession proof reputation, Aaron Sack, head of MSCP, told PE Hub in an interview.

While businesses have closed their doors nationwide in response to the covid-19 outbreak, veterinary services have now been declared as essential businesses in all 50 states.

“What that says to me? It’s further evidence that animals and pets are families. Even the government is stating that,” Sack commented. “It does validate a lot of this interest. And it’s taken a crisis like this to prove it.” 

Similarly, there was an acknowledgement in the online retail channel that people want to feed this interest, Sack said. Animal health is one of a handful of categories that e-commerce players have said they would prioritize in the supply chain. 

At Pathway, initial data shows that its specialty and emergency pet hospitals are holding up well in the early phases of the coronavirus crisis, Sack said. Still, he acknowledged that pet owners may be having second thoughts as it relates to general practice needs. 

Multifaceted growth

Vet care has seen tremendous PE activity in recent years, but Pathway is more than your standard network of vet hospitals and related back-office support. 

In addition to operating over 270 general practice, specialty and emergency veterinary hospitals throughout the U.S., the Austin, Texas-headquartered company encompasses more than 85 Thrive locations. Thrive is an affordable vet care venture located throughout Petco’s and elsewhere that attracts pet owners that might otherwise opt out or avoid traditional vet care.

Pathway also owns Veterinary Growth Partners, which is both a management services organization and group purchasing organization, helping its independent veterinary practice members achieve savings on pharma products and medical supplies, while also offering continuing education and training, marketing and practice-management tools. 

A multifaceted strategy has proven successful to date. Pathway has grown to approximately $150 million of EBITDA today, from approximately $15 million of EBITDA when MSCP completed its founder recapitalization of the company in August 2016, sources familiar with the transaction told PE Hub

An enterprise value of $2.65 billion also translates to a deal multiple of close to 18x, consistent with precedent activity in the sector.  

“Everyone who looked at this business did view it having three levers of growth,” Sack said. “That’s what really attracted [sponsors] to this asset.”

San Francisco-based TSG, PE Hub previously wrote, prevailed over other consumer-oriented firms in the running for Pathway, including Apax Partners and Roark Capital. The deal concluded a Harris Williams-run auction. 

After coronavirus 

Sack said that he expects Pathway in its next phase of growth to remain acquisitive, commenting that it will be interesting to see how seller behavior and valuations are impacted by the current covid-19 fueled market volatility. 

Before the economic chaos, public market and private valuations in vet care grew so high and the gap between smaller practices and larger platforms narrowed, Sack noted. “The rising tide lifted all boats … everyone traded up because the market seemed so forgiving.”

Valuations for platforms in recent transactions have fallen in the upper-teens to 20x EBITDA multiple zip code, while individual assets once valued at 5x or 6x have climbed to around 9x or 10x, according to PE Hub‘s previous reports. 

As New York-headquartered MSCP continues to look for opportunities in the animal health arena, Sack said he will be watching to see if there is a diversion or gap between vet players that are financially sound and those smaller mom-and-pops.

“An event like this re-frames valuation in any industry,” Sack said. 

BofA Securities, Guggenheim Securities and William Blair acted as co-financial advisors to TSG, while Harris Williams provided financial advice to Pathway and MSCP. Jefferies and Jamieson Corporate Finance advised the management shareholders.

Action Item: Action Item: Check out TSG Consumer’s latest Form ADV