U.K.-Based Veterinary Services Provider IVC Group Assigned Preliminary 'B' Rating; Outlook Stable

  • U.K.-based veterinary services provider IVC Acquisition Topco Ltd. intends to refinance its existing capital structure.
  • Although IVC is the leading consolidator of veterinary practices in Europe, it has financed much of its expansion through debt and is now highly leveraged.
  • We are assigning our preliminary 'B' credit rating to IVC Acquisition Topco Ltd. and its proposed term loan and revolving credit facility (RCF).
  • The stable outlook assumes that the company will continue to pursue its acquisitive strategy and continue to seamlessly integrate new assets, while maintaining S&P Global Ratings-adjusted margins comfortably in the 15%-19% range in the next 12 months, with adjusted leverage of 8x-9x, supported by positive free operating cash flow (FOCF) of at least £10 million.
LONDON (S&P Global Ratings) Feb. 4, 2019--S&P Global Ratings today took the 
rating actions listed above. Our ratings on IVC reflect the group's leading 
positions in its main markets--Sweden and the U.K. Although these markets 
remain relatively fragmented, they benefit from positive dynamics and are 
resilient to economic cycles. 

The secured debt that the group proposes to issue through IVC Acquisition Ltd. 
as part of its refinancing includes:
  • A £200 million RCF due 2025,
  • A £432 million term loan B1, and
  • A £350 million-equivalent term loan B2, denominated in euros.
Both of these term loans are due in 2026. We have assigned our preliminary 'B' 
issue-level ratings to the company's proposed secured debt and our and '3' 
recovery ratings indicate that we see recovery prospects of 50%-70% (rounded 
estimate: 65%). 

The capital structure also includes a £238 million second-lien term loan, also 
due in 2027, and £118 million payment-in-kind (PIK) notes. These are not 

The final ratings will be subject to the successful closing of the proposed 
issuance and will depend on our receipt and satisfactory review of all final 
transaction documentation. Accordingly, the preliminary ratings should not be 
constructed as evidence of the final ratings. If the final debt amounts and 
terms of the final documentation depart from the materials we have already 
reviewed, or if we do not receive the final documentation within what we 
consider to be reasonable time frame, we reserve the right to withdraw or 
revise our ratings.

The European veterinary services industry benefits from favorable dynamics, 
including loyal customers and a favorable payment system. Like the U.S. 
veterinary services industry, most users pay in cash. Cash payments support 
the group's cash flow generation. Pet insurance is gaining a foothold in some 
markets; about 80% of registered pets in Sweden have insurance and about 40% 
of those in Denmark and Norway. In the U.K., approximately 30% of pet owners 
had at least one pet insured in 2016 (up from 25.5% in 2011) and pet insurance 
is gaining ground.

Pet health insurance is not prevalent in other national markets. According to 
an estimate, approximately 80% of the payor profile is pet owners and the 
remaining 20% is insurance companies. This is broadly comparable with the U.S.

The industry's growth stems from like-for-like price increases, an increase in 
pet population, an increase in the number of visits, and a shift toward 
more-complex care treatments. Pet ownership is growing in line with population 
growth, at about 0.5% per year in Europe. Owners are also spending more on 
their pets because of an increased awareness of animal health. We expect the 
market will grow at an average compound annual rate of about 3.5%-4.0% in 

Despite ongoing consolidation, the veterinary service market is still 
relatively fragmented, increasingly competitive, and has relatively low 
barriers to entry. We consider that external players could easily enter the 
market by acquiring a small clinic in a neighborhood/region of operation. 
Nevertheless, the relationship between local vets and their customers should 
prevail over pricing considerations, given the importance customers place on 
the quality of services and knowledge of their vet. 

The market is dominated by a large number of small independent clinics; 
veterinary practice groups account for only a small proportion of the total 
addressable market, which we estimate is about €10 billion. This presents a 
consolidation opportunity, in our view, and we see the group as 
well-positioned to be one of the leading players in its core markets.

IVC's high concentration in the U.K. and Sweden, which act as hubs for 
acquisitions in other countries, enable it to consolidate across Europe. IVC 
enjoys a No. 1 position by revenue in five of its core markets:
  • The U.K. (23% market share),
  • Sweden (31% market share),
  • The Netherlands (20% market share),
  • Switzerland (5% market share), and
  • Finland (19% market share)
It ranks No. 2 in Norway, Germany, and Denmark, which it also considers to be 
core markets. IVC only entered the French, Belgian, and Irish markets in the 
first half of 2019. It aims to further expand in these.

Revenues are geographically concentrated. About 60% of sales, and 72% of the 
group's EBITDA, are generated in the U.K. Sweden contributes for 15% of sales 
and 11% of total EBITDA. The group aims to use these markets to anchor 
acquisitions in other countries across Europe. If it is successful in 
executing its business plan, we expect its exposure to the U.K. to fall to 
about 47% of group revenues and about 51% of group EBITDA. We would still view 
this as relatively high concentration. 

Operating efficiencies are mainly based on common procurement, but margins are 
lower than those of international peers. By November 2018, IVC had grown to 
about 1,000 clinics. To help it retain existing customers, IVC typically 
retains the brand name and vets in its newly acquired clinics, but centralizes 
procurement of drugs and materials (about 81%-83% of total gross purchases), 
from its key suppliers. Implementing common procurement is the group's key 
operating efficiency.

Historically, the group has been able to secure discounts on purchases of 
about 14% through wholesale suppliers and a further 40%-42% in manufacturer 
rebates (as a percentage of purchases from wholesalers).

The company has an asset-light business model. Its maintenance capital 
expenditure (capex) of about 3% chiefly relates to standardizing the new and 
existing clinics, and centralizing IT systems once acquired. Rental costs 
account for about 4% of revenues. 

The cost structure is flexible--about 48% of the costs are linked to staff. 
The salaries and commissions paid to vets and veterinary nurses vary from 
country to country, but are typically about 45%-55%. Profitability levels are 
further supported by IVC's pan-European presence, which supports supplier 
benchmarking, negotiating power, contractual standards, and direct 
procurement. We expect it to achieve back-office synergies via the 
centralization of processes. Centralized procurement across the group allowed 
IVC to benefit from joint volume discounts and streamlining of stock-keeping 
units; this can enhance profitability. 

We expect S&P Global Ratings-adjusted EBITDA margins, pro forma the 
refinancing, to be in the 15%-19% range in 2020-2021. This is lower than its 
U.S. peers, which report margins of 20%-22%. IVC also depends, to some extent, 
on external short-term vets, particularly in U.K., whereas the U.S. normally 
does not have any external vets. Additionally, U.S. peers seem to have higher 
pricing power. 

IVC's business model is focused on recurring visits, which create a recurring 
revenue stream that should remain resilient in an economic downturn. Of total 
sales, 80% are head-to-tail check-ups on small domestic pets. The group also 
offers specialist interventions, which make up the remaining 20% of total 
sales. These include cardiology, dentistry, dermatology, diagnostic imaging, 
oncology, etc. IVC also operates its own crematoria facilities and has a 
wholly-owned online practice, PDOL, which procures and sells prescription-only 
drugs and non-food medication, food, and accessories to customers. These 
services enable the company to offer a full range of veterinary services for 

About 85% of the group's revenues are recurring (defined as customers who have 
visited the same clinic at least once during the preceding year). This is 
broadly in line with rated peers in the U.S. It includes PHC members, who pay 
a monthly membership/insurance plan fee via direct debit. PHC members 
accounted for about 8% of the group's revenue in the U.K. in the 12 months to 
June 2018.

Although we view IVC's exposure to private payers as positive, it could expose 
the company to pricing pressure from competitors. These consumers are funding 
all treatment costs from their own pocket, increasing the company's exposure 
to any macro-level shocks (such as a delay in spending on dental treatment). 
That said, spending on pet companions has been relatively recession-resistant. 
In Europe, as in the U.S., services are mostly paid for in cash--there is no 
dependence on government revenues and low reimbursement risk. This 
characteristic makes the industry highly attractive. 

Leverage is likely to remain high as the company continues to finance its 
expansion using debt. IVC has primarily grown via acquisitions over the past 
few years, a trend we expect to continue. The group's business plan includes 
acquiring about 280-360 new clinics per year through to 2022. 

We estimate that adjusted leverage at the start of 2019 was 9x. Although this 
is expected to fall to about 8.5x in 2020 and to 8.0x-8.5x in 2021, we view it 
as high. That said, we understand that the company could stop making 
acquisitions during this period. It has a degree of control over its cash flow 
generation that increases its resilience, even under considerable stress. 

Our adjusted debt at the closing of the transaction includes about £1,020 
million of bank debt and £118 million in PIK notes we consider as debt. We 
also adjust our debt to incorporate about £300 million for operating leases. 
We do not net the group's cash balances in our forecasts, given that the 
company is owned by a financial sponsor. 
Working capital is structurally negative because most of the revenues are from 
payors who pay out of pocket. Thus, cash is collected immediately at the time 
of service, which leads to minimal accounts receivables. Trade payables have 
payment terms of 30-60 days with the main dental suppliers, which also leads 
to a favorable cash conversion cycle.

We forecast total capex of £30 million-£50 million over the next three years, 
mainly composed of maintenance capex, investment capex, and head-office capex 
used to integrate and centralize general IT functions at the new clinics. We 
expect reported pro forma FOCF generation of £48 million-£52 million over the 
next three years. 

We understand that IVC has a leverage target set at 7.5x and intend to reduce 
leverage below 7.0x by 2020 on a pro forma basis. Despite its growth strategy, 
the company can also choose to stop making acquisitions if needed. Although we 
view such an approach as very focused and prudent, we believe that the sheer 
volume of bolt-on acquisitions per year does expose the overall group to some 
integration risks, particularly from an operational point of view (that is, IT 
and finance). 

The main risk for IVC is that it will find it increasingly expensive to pursue 
its debt-funded acquisition strategy and will have to pay higher multiples. 
Historically, as M&A multiples have increased, particularly in U.K., the group 
has shifted to EU-based acquisitions.

Given the acquisitive strategy of the company, the stable outlook assumes that 
the company will pursue a disciplined M&A strategy and continue to seamlessly 
integrate new assets. We also assume it will maintain adjusted margins 
conformably in the 15%-19% range in the next 12 months, adjusted leverage of 
8x-9x, and positive FOCF of at least £10 million.

We could lower the ratings if the company finds it increasingly expensive to 
pursue its debt-funded acquisition strategy and that leverage therefore 
increases for a prolonged period. This could happen, for example, if operating 
issues led to weaker profitability, if the integration process brings 
additional costs, or if acquisitions resulted in higher consolidated leverage. 
We could also lower the ratings if fixed-charge coverage materially weakened 
compared with our base case on a sustainable basis or if IVC's liquidity 
profile deteriorated.

Although we consider a positive rating action unlikely at this stage, we could 
upgrade the company if IVC successfully integrates the acquired entities, 
ensuring sound profitability and annual FOCF that materially exceed our 
base-case forecasts. Such strong operational performance would need to be 
combined with significant debt reduction, so that leverage fell below 5x on a 
permanent basis and the private equity owner committed to maintaining it at 
this level.

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