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Covetrus fields take-private offer from CD&R and TPG

Sarah Pringle
May 23, 2022
Illustration of dog treats in the shape of a dollar sign.

Illustration: Aïda Amer/Axios

Clayton, Dubilier & Rice and TPG late last week submitted a $21 per share offer for animal health company Covetrus, equating to an equity value of approximately $2.9 billion.

Driving the news: The joint offer follows a broadly run Goldman Sachs sale process encompassing strategics and sponsors, sources tell Axios.

  • The nonbinding proposal implied an about 17% premium over the Portland, Maine-based company's closing share price on Thursday.
  • Covetrus has a supply chain products and distribution business; direct-to-home prescription pharmacy and compounding medications businesses; and a software and technology arm that improves veterinary office efficiency.
  • Covetrus' stock traded north of $19 per share during Friday and Monday morning trading.

Our thought bubble: CD&R, which already owns 24.2% of Covetrus, is the best PE acquirer given its history with the company.

  • Covetrus is a complicated business to assess given its multiple pieces, and it's likely other potential buyers liked certain assets but not all of the company.

Yes, and: TPG joining as a new investor alongside CD&R provides price validation of the offer.

Flashback: Covetrus was formed through the February 2019 union of CD&R-backed Vets First Choice and the animal-health arm spun off from Henry Schein.

  • Covetrus went public that month, opening at $43.05, but closing its first day of trading at $37.56 per share.

Between the lines: Although Covetrus shares had sunk 24%-plus this year (ahead of the CD&R/TPG offer), after retreating 31% in 2021, this is already a winning investment for CD&R.

  • At the time of the 2019 IPO, CD&R's stake in Vets First Choice was already worth 4.8x its investment to date, Sarah reported, citing a document circulated to investors. (Its net return is presumably now much higher.)
  • CD&R had invested just $100 million to date in Vets First Choice, including an initial $40 million investment in the company in July 2015, the document said.
  • A take-private would allow CD&R to take its current chips off the table and reinvest through a new fund.

What's next: If a take-private transaction is struck, CD&R and TPG have the ability to deploy whatever growth strategy they see fit. For example:

  • The PE shops could focus on the tech business, which is both higher margin and faster growing than the core distribution business, and then reexamine an IPO some years down the road.
  • Or, it could hypothetically break up the company, keep and grow what it likes, and divest the rest in pieces.

The bottom line: Given what the public markets look like today, Covetrus reflects the broader potential for public-to-private situations that are likely to unfold.

  • "This is private equity's 'nirvana' right now," one source says.
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