Grooming for Success
Allergies have kept Bob Antin from having any pets of his own, but that hasn’t stopped the president of Veterinary Centers of America from trying to become top dog in the animal-care world.
Antin has spent the last 11 years transforming the Santa Monica-based company into the nation’s largest animal hospital chain.
To further expand its empire, VCA continues to acquire new veterinary practices and venture into other pet industries. Just this week, it announced it was making a $6-million investment in the Anaheim-based Veterinary Pet Insurance Inc., to help make pet insurance more widely available to the public.
But before VCA can become the McDonald’s of the pet-care world, it must convince investors it survived what Antin refers to as the “hiccup,” but what investors may recall more as a wild free fall.
Last year’s troubles incorporating 100 new animal hospitals resulted in lower-than-expected earnings, and that sent its stock nose diving from the 30s to the single digits within a few months.
This year, having posted two quarters of better-than-expected earnings, VCA is confident it is back on track. Its stock has rebounded to about $15, and some analysts believe the company has repositioned itself for healthy growth in a stable and lucrative industry. VCA stock closed Thursday at $15.94 on the Nasdaq stock exchange, down 6 cents.
“The problem is that the investors who bailed got sucked into a momentum trap,” said Marc Robins, head of the Red Chip Review, a Portland firm that researches small companies. “Here is a company that through growth, determination and proper management could be a large stock, but it will take time to go through it.”
With 160 animal hospitals and 10 clinical laboratories that service all 50 states, VCA is by far the nation’s leader when it comes to corporate-owned veterinary chains. In fact, it is larger than all other chains combined.
Last year, VCA posted $182 million in sales in an industry estimated at $8 billion. Although VCA owns only 1% of the country’s animal hospitals, the potential for growth is vast as more veterinarians relinquish control of their private practices to corporations.
“I think these guys are extremely well positioned in an industry that’s ripe,” said Bryant Riley, head of B. Riley & Co., a Santa Monica-based stock research company.
Since the company was founded in 1986, VCA’s strategy had been to buy hospitals from veterinarians who generally want to continue working but no longer want the burden of running their own mom-and-pop practices.
“Consolidation is a natural thing to occur because of the increased cost of facilities, equipment and employees,” said Stephen C. Fisher, the company’s senior vice president of business development, whose own veterinary practice was acquired by VCA.
By incorporating each hospital into its centralized operation, VCA is able to capture larger profits than individual veterinarians because it can be more efficient when it comes to payroll, purchasing, accounting and marketing.
The corporate acquisitions of independent veterinary practices is a trend that many believe will continue.
“Younger veterinarians don’t have the resources to purchase large practices,” said Brad C. Gehrke, a research analyst at the American Veterinary Medical Assn. “One of the few options older veterinarians have is to sell to corporate entities, because of the increased value of large practices.”
In addition to growing its empire of animal hospitals, VCA has increased its profit potential by expanding into other pet-related businesses.
In 1993, it agreed to a joint venture with HJ Heinz to develop, market and distribute a line of high-end pet products called Vet’s Choice. A year later, the company also began consolidating the veterinary lab market. It eventually established the country’s largest veterinarian laboratory network, serving more than 9,500 hospitals nationwide.
With such ventures underway, VCA showed all signs it was destined to be a stock market star. Flush with confidence, the company acquired two of its primary competitors, the Pet Practice and Pets Rx, during the summer of 1996.
Initially, investors showed enthusiasm for the company’s bold expansion move that doubled its size, and shares flew to the $30 level. However, behind the scenes, VCA was in trouble.
The company had been in the midst of upgrading its computer financial systems and ran into glitches.
Some newly acquired hospitals also failed to send their bills to corporate headquarters, causing numerous problems. It also cost the company more than expected to convert the new facilities into VCA centers.
Rumors of trouble got out before the company’s third-quarter report and the stock began its quick descent. VCA’s stock dropped to a low of $8 in November, only two points higher than its initial public offering in 1991.
“Some institutional investors decided to bail, and that created an avalanche,” Antin said. “One day, we were actively traded. The next day, we were orphans.”
Antin said the company moved as quickly as it could to correct the problems.
Computer glitches were resolved. New mid-level managers came on board, and about 25 facilities that were too close to other VCA hospitals or did not meet the corporation’s quality standards were closed, merged or combined.
“We completed installation of new systems by end of last year, and we strengthened the management of the company by hiring new people with business expertise,” Antin said.
In February 1997, the company also shifted responsibilities of Vet’s Choice to Heinz Pet Products. Under the deal, VCA still owns a majority interest in Vet’s Choice, but it no longer manages the day-to-day operations, allowing the company to focus on running its animal hospitals.
Antin still maintains that the company did the right thing by buying the two other chains.
“The acquisitions made a lot of sense,” he said. “What hurt us was the expenses going through all of it. We didn’t have two good quarters, but when we turned the corner, our revenue, income and earnings per share were so ahead of last year that we believe that making the acquisitions were strategically important. Now we’re seeing the benefits.”
Since the start of this year, VCA has acquired about a dozen new animal hospitals, proceeding with its core strategy of acquiring new facilities, one at a time.
And earlier this week, the company also announced its multimillion-dollar investment with Veterinary Pet Insurance, the nation’s only animal insurance company. The capital will help the company provide insurance to more pet owners, which could ultimately help VCA, Antin said.
“We believe that pet insurance will become a more important part of the delivery system,” he said.
Still, VCA’s worries are hardly over. A class-action lawsuit also has been filed against VCA in Los Angeles Superior Court, alleging securities fraud arising out of its 1996 acquisitions. The lawsuit has been filed on behalf of those who purchased the company’s stock between Feb. 15, 1996, and Nov. 14, 1996.
Although the company vigorously denies the accusations, a negative judgment could cause further financial chaos.
Then, there is the matter of winning back investors.
“Typically, when a company has some problems and comes back, it takes Wall Street two or three quarters to believe them,” Riley said. “I think it will be detrimental if they don’t make their numbers the third and fourth quarters of this year, but my sense is that they will. After all, they are the market leader and they have a lot of leverage.”
