Mars Gains Larger Share of Petcare Market with VCA Buy

Candy maker to acquire VCA for $7.7 billion in an all-cash deal for $93 per share

mars1Candy and pet food conglomerate Mars Inc. has entered into an agreement with veterinary hospital operator VCA Inc. (NASDAQ: WOOF) to acquire the company for $7.7 billion in an all-cash deal for $93 per share, as reported by Reuters on January 09th, 2017. The deal would give Mars, the maker of Pedigree pet food, a larger share of the $4 billion global pet healthcare market. The family-owned Mars, best known for candies such as M&Ms and Snickers, would add about 800 pet hospitals to its network of more than 900 clinics, which includes the 61-year-old Banfield pet hospital chain. The transaction is expected to close in Q3 FY17.

mars2Based in McLean, Virginia, Mars is the biggest pet food company in the world; it held a 25% share of the $71.77 billion global pet food market as of 2015, followed by Nestle SA, the maker of the Purina cat and dog food brand. Mars and Nestle also hold the mantle of being the No.1 and No.3 confectionary makers in the world, respectively, according to Euromonitor. The pet healthcare market has been growing at an annual rate of 7-8% over the long-term, and the addition of VCA would help Mars gain leadership in this space. With $33 billion in annual sales in 2015, Mars operates in six business segments: Chocolate, Petcare, Wm. Wrigley Jr. Company, Food, Drinks, and Symbioscience, the company’s life sciences division.

Transaction details

Mars’ offer of $93 per share is valued at approximately $9.1 billion including $1.4 billion in outstanding debt. The transaction price represents a premium of approximately 41% over VCA’s 30-day volume weighted average price on January 06th, 2017, and a premium of approximately 31% over VCA’s closing price on January 06th, 2017. The agreement has been unanimously approved by the boards of directors of both companies. VCA, founded in 1986, reported annual sales of $2.13 billion in 2015. Mars, which also owns the BluePearl chain of emergency and specialty veterinary care clinics, had annual pet food sales of $17.80 billion in 2015, according to Euromonitor.

mars3Over the years, VCA has grown from a single facility in Los Angeles, California, to nearly 800 animal hospitals with 60 diagnostic laboratories throughout the US and Canada. Through organic growth and a series of acquisitions, VCA has become one of the largest and most diverse pet healthcare companies, operating across four divisions including veterinary services, laboratory diagnostics, imaging equipment and medical technology, and pet care services. VCA offers its services through a nationwide clinical laboratory system that services all 50 states and Canada (Antech Diagnostics), the leading animal diagnostic imaging company (Sound), and Camp Bow Wow, the nation’s Premier Doggy Day and Overnight Camp® franchise.

Morgan Stanley & Co. LLC and BDT & Co were Mars’ financial advisers, while Skadden, Arps, Slate, Meagher & Flom provided legal advice. Barclays was VCA’s financial adviser and Akin Gump Strauss Hauer & Feld LLP and Potter Anderson Corroon LLP were legal advisers.

VCA to be a separate business unit within Mars Petcare

Upon completion of the transaction, VCA will operate as a distinct and separate business unit within Mars Petcare, alongside its other Veterinary Services businesses, Banfield Pet Hospital, BluePearl, and PET PARTNERS™, and will continue to be led by Bob Antin, Chief Executive Officer, President, Chairman and a founder of VCA. The company will remain headquartered in Los Angeles, California and will remain focused on its business model and strategic objectives.

Candy makers diversify business

In recent years, chocolate and candy makers have been diversifying their business as calorie-conscious consumers increasingly shun sugary sweets, a trend that has weighed on the $183 billion global confectionery market. According to Euromonitor, global retail sales of chocolates in 2016 were down about 1.9% versus 2014. With consumers eating less chocolate in the U.S. and Europe, the largest chocolate consuming regions, confectioners have reduced the size of sweets and are using more fillers. Moreover, lower chocolate consumption and a supply surplus of raw cocoa has resulted in plummeting cocoa prices over the past few months.mars4

Moreover, chocolate and beverage makers including Dr. Pepper Snapple Group Inc. (NYSE: DPS), Kellogg Company (NYSE: K), Snyder’s-Lance Inc. (NASDAQ: LNCE), Nestlé, and Mondelez are under increasing pressure from health experts and governments to reduce the amount of sugar, salt, and saturated fats, and calorie count in snacks and beverages and thereby control obesity and diabetes among the population.

Iconic chocolate maker The Hershey Company (NYSE: HSY), which reported plunging sales in 2015 for first time in more than a decade, is tapping opportunities in the growing trend of healthy snacking among consumers who are embracing protein bars and other nutritional eats. To beat slowing sales and grab a slice of the booming snacks market, Hershey’s is diversifying into dried meat with the launch of Hershey beef jerky. As a first step in its diversification into the snacks category, Hershey acquired Krave Pure Foods, a maker of premium beef jerky with about $35 million in sales, in 2015. Hershey aims to grow Krave into a $500-million brand. Hershey is also launching snack bars with super foods such as acai berries, trail mixes with pieces of Reese’s Peanut Butter Cups, and protein coated jalapeno almonds and pumpkin seeds. Hershey’s is aiming for revenue of $2 billion in the snacks segment as a means to offset the dip in chocolate consumption.

Rival Mondelez International Inc. (NASDAQ: MDLZ) recently introduced Good Thins, its first snack brand in more than a decade. Seeking to diversify its operations, Nestlé and R&R, UK’s leading ice cream company, have joined hands to set up a joint venture company called Froneri, with sales of around CHF2.7 billion in over 20 countries.

Stock Performance

mars5VCA’s stock stood at $91.00, inching up 0.11%, at the close on Thursday, January 12th, 2017, having vacillated between an intraday high of $91.10 and a low of $90.82 during the session. The stock’s trading volume was at 4,859,450 for the day. The Company’s market cap was at $7.38 billion as of Thursday’s close.

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