Morgan Stanley Capital’s Pathway Vet Alliance considers strategic options

Morgan Stanley Capital Partners is evaluating strategic alternatives for Pathway Vet Alliance about three years into its investment in the rapidly-growing veterinary care company, according to several people familiar with the matter.

Harris Williams, Morgan Stanley Investment Banking and Jefferies have been retained to advise on an anticipated process for the Austin, Texas, vet hospital management group.

The firm is expected to run a dual-track sale and IPO process for Pathway, with Morgan Stanley Investment Bank’s involvement focused on a potential public offering only, three of the people said.

Marketing materials have yet to be distributed; however, a process could launch as early as this fall, one of the people said.

Pathway is likely to market around $150 million of Ebitda, two of the people said.

Based upon the high teens to 20x Ebitda multiples at which recent vet care assets have traded, MSCP in a potential sale would likely seek a valuation in the high $2 billion-range to upward of $3 billion, three of the people said.

As vet hospital chain valuations have continued to creep higher, Pathway is likely to benefit from both scarcity value – as one of the few available assets of scale – as well as its differentiated strategy, the people said.

Pathway not only encompasses a conventional retail clinic strategy similar to other large industry players, growing both organically and through M&A, but also owns an affiliated group purchasing organization, Veterinary Growth Partners.

VGP, a membership organization for independent veterinary practice owners, helps affiliated partners achieve savings by leveraging the group’s buying power on pharmaceuticals, reference labs, equipment and medical supplies, among other things.

This component of the business is viewed as uncharted territory, and hence when assigned additional value, could push Pathway’s total enterprise value into the $3 billion zone if a sale is pursued, one of the people speculated.

Founded in 2003, Pathway has expanded from a single veterinary practice to more than 200 locations across 34 states. The company offers its network of general and specialty clinics and veterinarians back-office operational support, tools and resources. Pathway has produced three-year revenue growth of 1,065 percent, according to Inc. magazine’s annual Inc. 5000.

Pathway has further distinguished itself as a shareholder in Thrive Affordable Vet Care, which offers affordable vet care at locations nationwide, including within various Petco stores.

MSCP completed its founder recapitalization of Pathway in August 2016. The company is led by CEO Stephen Hadley, while Thrive CEO Odis Pirtle joined Pathway as its new COO earlier this year.

Industry Activity 

Setting a new high-water mark for vet hospital transactions, JAB Investors earlier this year unexpectedly outbid financial sponsors to take home the win for Quad-C’s Compassion-First Pet Hospitals.

At an enterprise value of about $1.2 billion including post-closing tax benefits, the price tag topped the 17x to 19x range at which precedent transactions had traded, Buyouts reported.

JAB, which invests on behalf of Germany’s Reimann family, subsequently bought National Veterinary Associates in a June transaction said to equate to a $5 billion-plus valuation. The deal marked an exit for Ares Management and OMERS Private Equity.

Also this year, Partners Group invested in Blue River PetCare in a deal valued between $440 million and $500 million, Buyouts reported.

In other large market activity, Oak Hill Capital Partners in June 2018 bought VetCor in a process expected to command a valuation north of $1.5 billion. Nordic the same month sold AniCura to Mars in a deal valuing the European chain at close to 2 billion euros including debt.

KKR in December 2017 bought PetVet, while Mars in September 2017 bought VCA for $9.1 billion.

MSCP, for its part, knows the pet care space well, having acquired Manna Pro, a maker and distributor of specialty pet nutrition and care products, in 2017.

In recent new healthcare platform investments for MSCP, the firm in June prevailed in the auction for WindRose’s Ovation Fertility, a Los Angeles network of in vitro fertility and genetic testing labs. MSCP invested in Clarity Software Solutions in January.

MSCP, Pathway and Morgan Stanley Investment Banking declined to comment, while those with Jefferies and Harris Williams did not immediately return requests for comment on Tuesday.

Action Item: Check out MSCP’s latest Form ADV filing: