Consolidation in the UK vet sector has continued at a remarkable pace since Aldwych Partners first reviewed the sector in October 2018. In the past 16 months, four firms, IVC Evidensia, VetPartners, Linneaus Group and Medivet, have acquired some 240 vet care businesses, accounting for nearly 500 vet practices. This represents around 10% of all UK vet practices.
We estimate that 50-100 of these transactions were eligible for review by the Competition and Markets Authority (CMA). Had these transactions been reviewed, many would have received a quick and unconditional clearance. In other cases, however, where local market shares have reached 80%, there may have been more significant challenges in securing CMA clearance.
Around half of the 240 vet business acquired since October 2018 had a single practice. Less than 10% had practices at five or more locations. Most were first opinion practices for small animals, but some of the acquired businesses also included first opinion practices in the equine and farm segments as well as more specialist referral practices. The largest acquisition was IVC Evidensia’s purchase of VetsNow, the UK’s largest out-of-hours vet care provider. A separate briefing note on out-of-hours vet care is here, with the VetsNow data excluded from the analysis below.
The first part of this note looks at how many of the 240 transactions from the past 16 months qualified for review by the CMA, while the second examines a few of these in more detail. (As a blog post, we’ve tried to keep this short and to the point, but feel free to get in touch to discuss further detail.)
Eligibility of recent vet sector M&A transactions for a CMA review
Our estimate that 50-100 of the 240 vet care acquisitions since October 2018 were eligible for review by the CMA is based on the ‘share of supply’ test.
A transaction meets the ‘share of supply’ test where the combined business supplies 25% or more of a good or service in a ‘substantial part of the UK’. There is no statutory definition of ‘a substantial part’ of the UK, but CMA merger guidance notes that Slough, a unitary authority in England (pop. 150k), and Renfrewshire, a council area in Scotland (pop. 180k), have both previously been found to be substantial parts of the UK.
We measured the share of supply using a count of vet practices in the local authorities where the acquisitions occurred. When acquired practices were in dual district / county council areas (rather than in a unitary authority such as Slough), we calculated the share of supply at both a district and county council level. Fewer transactions met the share of supply test at the county council level, but district councils tend to have populations that are closer in size to that of Slough.
Even more transactions may have qualified for a CMA merger review than the 50-100 we identified. The share of supply test is highly flexible. Revenues, employees or customer numbers – not just practice numbers – could be used to decide whether the test has been met. Further, our estimate is based on all vet practices in a local authority, but the test could be applied using a narrower set of practices (e.g. only first opinion small animal practices).
Some of the 50-100 transactions that met the share of supply test may also have met the de minimis test. The CMA need not review transactions where the affected market has annual revenues of less than £5 million. (This includes revenues at: (i) practices already owned by the purchaser; (ii) those acquired in the transaction; and (iii) those owned by third parties.) Our sense, however, is that relatively few local markets are under this threshold. More transactions might fall within the £15 million de minimis threshold for exemption from a detailed Phase 2 investigation (when a problem is found at Phase 1). That said, de minimis exemptions are generally only available where there are no clear cut undertakings available at the end of a Phase 1 review. Transactions involving the acquisition of multiple practices, where some could be divested, would not meet this requirement.
With no reviews by the CMA of so many qualifying vet transactions in the past 16 months, several conclusions are possible. It could point to a well-functioning voluntary notification system where low risk transactions are not being needlessly reviewed by the CMA, or it could point to an accumulating level of competition risk that operators may need to more actively manage if they continue to expand at the current rate.
Competitive effects of recent vet sector M&A transactions
To gain further insight, we looked more closely at a subset of the acquisitions that potentially qualified for a CMA review. Many do not seem to raise any competition-related concerns. However, in some cases, acquirers are incurring more significant risks.
To illustrate, acquisitions in three areas (South Wales, Scottish Borders and South Lincolnshire) are reviewed below. In two cases, the acquiring vet business has ended up with a local market share of around 80%, and in the third, its local market share is around 60%. (Our analysis of IVC Evidensia’s acquisition in August 2019 of Scarsdale, a 13 practice business in Derbyshire, is also available here.)
Torfaen, South Wales
The acquisition of a two practice vet business in Torfaen by a national vet chain added to its already significant presence in Newport and the surrounding area. The acquirer’s local market share, based on a 20-minute drivetime centred on an acquired practice in Cwmbran, increased from 67% to 78%. It now owns 14 out of 18 small animal vet practices in this local market. (In reviewing this transaction and the others below, we have used 20-30 minute drivetimes, depending on population density, to approximate the local geographic market.)
The four remaining small animal practices in the local market are separately owned. One, in Newport, is owned by another national vet chain, while the other three are independent practices. (Two other vet practices in the area do not cater for small animals, one has a farm animal specialism and the other an equine specialism.)
The purchase of a six practice vet business in the Scottish Borders resulted in the acquiring vet chain increasing its local market share, based on a 30-minute drivetime centred on an acquired practice in Kelso, from 40% to 80%. It now owns eight out of ten small animal veterinary practices in this local market. The remaining two small animal practices in this market are separately owned, one by another national chain and the other independently. (A third vet practice in this area is a specialist equine practice.)
The acquired business was itself formed from a merger of two smaller practices in 2015. Mergers of smaller vet practices, as a means of increasing their attractiveness to larger purchasers, seems to be a not uncommon occurrence.
A national vet chain has acquired six practices in South Lincolnshire since October 2018 in three separate transactions. Adding to the two practices it already owned, its local market share, centred on an acquired practice in Spalding, increased from 15% to 62%. It now operates 8 out of 13 practices in this local market.
The three transactions reviewed above are, in our view, atypical of most of the 240 acquisitions that took place in the vet sector over the past 16 months. However, if the pace of acquisition continues at the current rate, with another 500 practices acquired by national vet chains in the coming 18 months, then many of these upcoming transactions have the potential to look like these three. Careful management of these risks will be needed.