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Morningstar | Greencross Likely to Be Snapped up by Private Equity Firm TPG Capital

Following weeks of takeover talks, no-moat-rated Greencross finally received a formal offer from Vermont Australia, an entity owned by private equity firm TPG Capital Asia. Both firms have entered a Scheme Implementation agreement, for a total consideration of AUD 5.55 per share. We view this as a pleasing outcome, and the price appropriately reflects the quality of the business, largely supporting our positive view on the stock at the previous depressed price levels. The consideration is an attractive premium to recent trading levels, albeit below our AUD 6.00 per share fair value estimate. The board has recommended the scheme, subject to an independent expert’s report, and at this stage, we are also in favour, in absence of a superior offer. We expect the takeover to proceed, hence we have adjusted our fair value estimate to AUD 5.55 per share, in line with the offer price.

Despite the offer price being slightly below our intrinsic valuation on a stand-alone basis, it provides shareholders in Greencross with certainty of cash (or a combination of cash and scrip in Vermont) in the near term, especially with a higher offer from another suitor unlikely. The AUD 5.55 per share price tag implies an enterprise value of 10 times our fiscal 2019 EBITDA forecast, and represents a 44.5% premium to the one-month volume weighted average price or AUD 3.84 per share (up to and including Oct. 9, 2018, which is the last date prior to the announcement that Greencross has received proposals). The offer permits payment of an AUD 0.21 per share fully franked dividend, on or before the implementation date, although the consideration will be reduced by the same amount. Investors have the option of electing to receive the entire value in cash, or a combination of cash and shares in Vermont. No action needs to be taken at this time, and the vote is expected to take place late in the first quarter of calendar 2019.

While the takeover is undoubtedly the main focus for shareholders in Greencross, the firm also provided a trading update at the recent annual general meeting, which for the most part highlighted a continuation of recent trends. Group revenue and like-for-like, or LFL, sales increased by 7.6% and 5.4% respectively during the first 17 weeks of fiscal 2019, and at the current pace, the firm is tracking broadly in line with our full-year estimate. The integration of veterinary services is proving fruitful and contributed to the 6% increase in retail LFL sales, despite the competitive landscape, and a healthy 3% increase in LFL vet sales. At the top line, the only real weakness is coming from the standalone vet clinics, where LFL sales declined by around 2% which we attribute to key veterinary staff turnover, and some cannibalisation from the new in-store clinics, and a softer discretionary consumer environment. However, this weakness was more than offset by strong performance in the in-store clinics, which we estimate are delivering double-digit LFL growth, evidence the integration strategy is working. This remains the company’s core focus, and we expect the integration of services within the retail store network to drive foot traffic, cross-selling opportunities and scale benefits in the future.

We are slightly disappointed with the progress of the cost savings, with management flagging the incremental EBITDA benefits in the first half of fiscal 2019 are unlikely to materialise due to higher reinvestment into digital. This increased investment into digital makes sense from a strategic standpoint, given shifting consumer preference, and Amazon’s pursuit of the Australian pet market. We have trimmed our fiscal 2019 EBITDA estimate by around 4% to AUD 100 million, although our long-term EBITDA forecasts are broadly unchanged.