New York-based Leonard Green & Partners LP’s third fund took kindly to Man’s furry friends. At one point Fund III held PETCO Animal Supplies Inc, a chain retailer of pet foods and related products; VCA Antech, an operator of more than 300 free-standing animal hospitals; and Phoenix Scientific Inc., a manufacturer of generic drugs for agricultural and domestic animals. But like all private equity firms, Leonard Green had to set its assets free. The first two took the public rout via IPOs, while the latter was shopped to a single strategic buyer and will be sold for almost $272 million. The deal is expected to close in the second quarter.
The sale of Phoenix Scientific to Miami-based pharmaceutical company IVAX Corp. will provide the firm with an approximated 20% IRR, John Baumer, a partner at Leonard Green told Buyouts. As per the terms of the agreement, IVAX will pay a combination of $196.85 million in cash and $75 million in common stock as consideration for 100% of Phoenix Scientific. IVAX discovers, develops, manufactures and markets branded and generic pharmaceuticals both domestically and internationally. Phoenix Scientific will be rolled into DVM Pharmaceuticals, IVAX’s wholly owned animal health division.
Though this strategic sale breaks Leonard Green’s pattern of creating public, standalone companies out of its former animal care investments, the synergies available between IVAX and Phoenix Scientific created a quicker, more appealing exit opportunity than a pubic offering could have, Baumer said. “This was a more attractive exit for this company and it provides us additional upside through stock ownership in IVAX,” he added.
Leonard Green acquired St. Joseph, Mo.-based Phoenix Scientific in October 2002 through a leveraged recapitalization valued between $275 million and $300 million, Baumer said. Financing for the transaction included a $100 million equity investment from Leonard Green, a $150 million mezzanine loan and a $25 million revolver.
“The thesis was that the generic pharmaceuticals segment within animal health industry was poised for strong growth. [Phoenix Scientific was] the largest player in the sector and we saw great potential in them for strong organic growth, and in our view, the investment played out just how we hoped,” Baumer said, adding that the company’s EBITDA grew more than 20% in the past two years.
Most of Phoenix Scientific’s products are used for animals raised for consumption, though the company has recently been increasing its emphasis on the growing companion animal market. Currently, Phoenix Scientific manufactures more than 80 products in the form of oral liquids and solids, injectables, pour-ons and pastes. Since its first FDA approval for a product in 1994, Phoenix has averaged one new approval approximately every two months and currently has a pipeline of more than 50 products.
“The strategic acquisition of Phoenix will allow IVAX, supported by DVM’s strong sales force, to offer the largest number of quality products to distributors, prescribing veterinarians, farmers and pet owners in the United States,” according to IVAX.
Phoenix Scientific was the third of Green Equity Investors III LP’s pet and animal care investments. In October 2000, the firm teamed up with Texas Pacific Group to take pet food and supply retailer PETCO private in a deal valued at approximately $600 million. In February 2002, 26% of PETCO (NASDAQ: PETC) was floated in a $275.5 million IPO, which valued the company at about $1.1 billion and returned approximately 4.5x the buying duo’s total invested capital.
Also in 2000, Leonard Green acquired Veterinary Centers of America, later called VCA Antech, for $15 a share-about 12x earnings-in a transaction that included a $300 million senior credit facility, an issuance of $20 million in senior subordinated notes and $100 million in holding company notes. VCA Antech went public in a rocky IPO for $10 per share in Nov. 2001 and currently trades on the NASDAQ under ticker symbol WOOF. As of press time, VCA shares were trading at $19 while PETCO shares traded at $35.69.