Breakingviews - EQT leaves hot markets behind with $15 billion pet LBO

Iranian vets examine a dog at Elahieh Pet Hospital in Tehran, Iran December 19, 2019. Nazanin Tabatabaee/WANA (West Asia News Agency) via REUTERS

LONDON (Reuters Breakingviews) - A convoluted 12.3 billion euro pet-care deal involving EQT, Silver Lake and Nestlé carries a clear message for public markets. Even amid an initial public offerings boom and hot stock-market valuations, private investors will be reluctant to part with the most promising assets.

Swedish buyout group EQT helped to create IVC Evidensia in 2017 with the merger of two of its portfolio companies. Consumer giant Nestlé subsequently bought a minority stake. The group rolls up independent veterinary clinics across Europe and boosts their growth by investing in technology, sharing best practices and cross-selling more specialised treatments.

It’s time for EQT to realise some cash from the business, having been invested in IVC Evidensia’s two main antecedent companies since 2016 and 2014 respectively. But rather than follow the current rush of private-equity IPOs, including Dr. Martens and greeting-card maker Moonpig, EQT is keeping the business private.

The firm said late on Monday that its older fund, along with other existing shareholders, will sell a stake to U.S. buyout group Silver Lake, a smaller holding to Nestlé, and flip another chunk to a new EQT fund. Roughly 3.5 billion euros’ worth of shares are changing hands, with Silver Lake and the new EQT fund buying the lion’s share.

It may seem risky to shun public markets while stock valuations are high, especially since EQT still hopes to float the business at some point in the future, according to people familiar with its thinking. Yet IVC Evidensia’s growth mitigates the risk that markets will be choppier when it eventually lists.

The vet group is riding a wave of increased pet spending in rich countries. The current owners expect EBITDA to grow by roughly one-quarter between the current financial year, ending in September, and the following one. And investors in EQT’s old fund are getting a decent price: the deal values IVC at almost 30 times forward EBITDA – roughly the average of listed pet groups Elanco Animal Health, Zoetis, IDEXX Laboratories and Covetrus.

Rather than missing an opportunity to float at a toppy value, EQT instead seems to have found a way for it and Silver Lake to pocket a few more years’ worth of gains as the company grows. Public investors will eventually get a more mature company. Even amid bubbly fervour, the real growth stays firmly in private hands.


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