CVS mulls paths to growth after CMA intervention

Shares in veterinary services company CVS (CVSG) had been on the slide prior to the half-year results, a drop accelerated by the Competition and Markets Authority (CMA) raising concerns over CVS’s potential acquisition of rival company The Vet. 

The CMA seems minded to accept the undertaking by CVS to divest the entire business. Now that CVS has effectively agreed to return to the status quo ante by selling the 'The Vet' business as a going concern, with no other solution seemingly available, the question then becomes how the company will be able to grow without incurring the regulator's future wrath. To that end, management took some positives from the episode in that at least the CMA has clarified the market conditions that would avoid its intervention.

In essence, the CMA thinks that any expansion that involves building a market share of more than 30 per cent of the available qualified first-opinion vets in any given area would significantly lessen competition. So, in a UK market where it already has 467 individual veterinary practice sites, that leaves CVS with a quandary about where it can safely grow.

The options seem to include expanding greenfield treatment sites for companion animals, possibly also with farm specialisms. Management said it has identified 10 possible locations for these types of practices. Another answer might be to expand its presence in continental Europe, which has a large - and largely unconsolidated – veterinary market. CVS seems to be making a move in that direction with the post-period acquisition of a practice in the Netherlands.   

Meanwhile, it is a documented fact that the pet population in the UK has increased significantly over the past two years as locked down families and individuals sought some solace by acquiring an animal friend. While this led to some lurid stories about professional dognapping gangs targeting individual dogs while the owners were out, CVS said that it had so far seen no particular benefit coming through from the rise in the population. However, as animals age the need for clinical treatment should start to be apparent over the next five to 10 years, management said.

CVS’s underlying performance has clearly started to recover from the impact of the pandemic. The CMA’s decision is more awkward as it raises question about how easy future expansion will be. At over 20 times Berenberg’s forecasts for EPS for 2022, the shares have de-rated in relative terms, but given that the business model is proven, we are happy to stay buyers. Buy.

Last IC View: Buy, 1,815p, 30 Mar 2021