Proposed placing and Acquisit

RNS Number : 4323H

CVS Group plc

19 February 2010

 



For Immediate Release

19 February 2010

CVS Group plc

CVS, one of the UK's leading providers of veterinary services, is pleased to announce:

Proposed placing and

acquisition of Veterinary Enterprises & Trading Limited

·    Placing of 4,736,842 new Ordinary Shares at 190 pence per New Share to raise approximately £9.0m (approximately £8.6m net of Placing expenses) to help fund the Proposed Acquisition of Veterinary Services & Trading Limited for a total cash sum of  approximately £12.2m

·    The Board believes that the Proposed Acquisition will be earnings-enhancing in the first full financial year of ownership

·    The Placing Price of 190 pence per New Share represents a discount of approximately 2.8 per cent. to the Closing Price of 195.5 pence per Ordinary Share on 18 February 2010

·     The Placing has been fully underwritten by Brewin Dolphin

Contacts:

CVS Group plc Simon Innes, Chief Executive Paul Coxon, Finance Director	01379 644 288
Buchanan Communications Richard Oldworth Suzanne Brocks	020 7466 5000
Brewin Dolphin Investment Banking Richard Jones/Matt Davis Paul Mason	0845 059 6740

The definitions in this announcement have the same meaning as in the Circular sent to Shareholders today.

Introduction

The Board of CVS has today announced its interim results for the six months ended 31 December 2009 and the conditional acquisition by CVS (UK) of the entire issued share capital of Veterinary Enterprises & Trading Limited, a holding company which, through various subsidiaries, operates veterinary surgeries and a laboratory in the South East of England.

CVS has also today announced a Placing of 4,736,842 new Ordinary Shares at 190 pence per New Share to raise approximately £9.0million (approximately £8.6 million net of Placing expenses) to help fund the Proposed Acquisition. The Placing Price of 190 pence per New Share represents a discount of approximately 2.8 per cent. to the Closing Price of 195.5 pence per Ordinary Share on 18 February 2010 (being the last Business Day prior to the announcement of the Proposed Acquisition). The Placing has been fully underwritten by Brewin Dolphin, subject to certain conditions set out in the Placing Agreement.

The Acquisition Agreement provides for the acquisition of the entire issued share capital of Veterinary Enterprises for cash consideration of approximately £9.90 million and the discharge by CVS (UK) on Completion of bank indebtedness of the VET Group totalling £2.26 million plus a further payment as settlement of break fees in respect of interest rate hedges which the Directors do not expect to be in excess of £50,000 and therefore not material in the context of the Consideration. The Consideration is being funded predominantly from the Placing Proceeds, with the balance being satisfied from the Company's existing cash resources.

Shareholders should note that the Placing and consequently the Proposed Acquisition are conditional upon, inter alia, the Resolutions being passed by the requisite majority at the General Meeting. If the Resolutions are not passed by the requisite majority, the Placing and consequently the Proposed Acquisition will not proceed.

A Circular has today been posted to Shareholders to outline the background to and reasons for the proposed acquisition of Veterinary Enterprises and the Placing and to explain why the Board considers the Proposed Acquisition and the Placing to be in the best interests of the CVS Group. The Directors are recommending that you vote in favour of the Resolutions at the General Meeting as they intend to do in respect of 1,400,256 Ordinary Shares held, directly or indirectly, by them, representing approximately 2.72 per cent. of the Existing Share Capital.

Information on CVS

The Directors believe that CVS is the largest employer and operator of small animal veterinary surgeries in the UK. The Group operates 170 veterinary surgeries across the UK, five veterinary laboratories and one pet crematorium. The Directors believe the Group continues to be the largest employer in the UK veterinary profession, with 1,813 staff including 454 vets as at 31 December 2009.

CVS was formed in 1999 and floated on AIM in October 2007. Since flotation, the Group has continued to expand in line with its stated strategy at IPO, acquiring 44 surgeries, three laboratories and a pet crematorium. The business model utilises the strong cash generation of the business to acquire new surgeries on sensible multiples and then to improve margin performance and increase revenue by a combination of:

·     the deployment of better buying power

·     the provision of existing central services to support practices

·     assistance with sales and marketing.

The Group intends to continue its strategy of growth through acquisition in the fragmented UK veterinary market, combined with organic growth of clinical services across its three business areas. In addition, the ability to provide laboratory and crematorium services facilitates vertical integration and drives further efficiencies. The Directors believe that CVS has a share of the small animal veterinary market in the UK of approximately 7 per cent., as measured by reference to the number of small animal surgeries.

The Group delivered significant growth in revenues, profitability and cash generation in the financial year to 30 June 2009, compared with the prior year. Total Group revenue increased by 23 per cent. to £76.61 million and cash generation increased by 90 per cent. to £12.38m. The veterinary practices and crematorium acquired in the financial year contributed revenue of £5.72m during the year. Operating profit increased by 72 per cent.  in the year to 30 June 2009 from £4.08m to £7.01m. The Group recorded a profit after income tax for the year of £3.04m (2008: loss of £0.34m as restated). Adjusted earnings per share was 11.5p, 44 per cent.  up from 8.0p in the prior year (as restated). Basic and diluted earnings per share were 5.9p and 5.8p, respectively.

The Directors believe that acquisition opportunities continue to present themselves, aided by both a lack of competitive activity and the ability of CVS to provide an exit route to practice owners. The Group has a strong pipeline of potential acquisitions under consideration.

The Market

The market for veterinary products and services in the UK exceeds £1.1 billion and is highly fragmented, with 4,470 veterinary surgeries in the UK in 2009. The small animal category, in which CVS operates, accounts for 54 per cent. of the total (2,399 surgeries) and the fragmented nature of the market is such that, in total, the top six corporate operators account for only 17 per cent. of UK small animal surgeries. Key features of the UK market include:

·     favourable demographics driving up pet ownership

·     growth in companion small animal spending

·     highly fragmented small animal veterinary surgery market

·     limited veterinary laboratory facilities; dominated by IDEXX, CVS and Dechra

·     fragmented pet crematoria market with many privately owned crematoria.

The companion animal market continues to grow, driven by a combination of factors including:

·     progressive rise in UK households owning pets

·     rising pet life expectancy

·     an increased propensity by pet owners to spend on animal health

·     new product developments such as dietary products

·     the growth of pet insurance.

The biggest categories in the companion animal market are cats and dogs and these grew by 24 per cent. and 12 per cent., respectively, between 2000 and 2005.

Information on VET Group

The VET Group was established in 1998 in West Sussex. Operating under the Pet Doctors brand, it has since grown through its strategy of acquiring "first-opinion" veterinary clinics across the South East of England.  Currently, Pet Doctors operates 27 veterinary surgeries which, excluding the management team, employs approximately 160 staff, including around 40 vets. The Pet Doctors clinics are managed by five area managers. The VET Group has an established organisational structure in place with centralised finance, marketing, IT and HR functions.

The VET Group also includes Greendale, which has been providing diagnostic and related laboratory services to veterinary surgeons, zoos and universities for over 20 years, and Wey Referrals, a specialist referrals centre operated by Pet Doctors, which offers "second-opinion" and other services not typically available in front-line veterinary practices. Greendale employs 13 staff and offers a broad range of diagnostic services also offered by CVS's existing laboratories.  The Wey Referrals business employs 17 staff, including five vets.

The VET Group delivered revenue growth in the financial year to 31 March 2009, increasing 3.3 per cent. to £12.8m, driven by organic growth and a partial year contribution from acquisition activity. Gross margins increased from 50.3 per cent. to 52.3 per cent. over the same period, reflecting the growth of revenue over a largely fixed cost base.  VET Group EBITDA increased to approximately £0.81m from £0.78m despite incurring certain one-off charges including bank refinancing fees in 2009.

In the six months to 30 September 2009, the VET Group has continued to make good progress, growing revenues and further improving margins.

Summary of VET Group financials

	Year ended 31 March 2009 (£'000)	Year ended 31 March 2008 (£'000)
Revenue
Vet Services
Pet Doctors	10,949	10,210
Wey Referrals	1,131	1,375
	12,080	11,585
Labs	956	1,010
Inter company	(234)	(202)
Total Sales	12,802	12,393
EBITDA	809	777
EBITDA margin	6%	6%
Net Debt	2,876	3,018
No. of practices	27	27

Background to and reasons for the Proposed Acquisition

CVS has grown both organically and by making selective acquisitions in order to expand its activities and UK-wide presence. Acquisitions have been successfully integrated, including the most significant acquisition to date: a group of 25 surgeries which were acquired in September 2006. Management has a strong track record of significantly enhancing the performance of the Group's acquired surgeries and the Directors are confident that the Group will rapidly integrate the VET portfolio into its existing operations and deliver enhanced performance.

VET is a similar business to CVS operating in the same small animal veterinary surgical market and offering complementary diagnostic services. Having been established as a single practice, VET has grown predominantly by acquisition and now operates across the South East of England. The Proposed Acquisition represents a significant step in the Group's consolidation of the veterinary market within a highly populous part of England, without adversely affecting its existing, ongoing programme to acquire small animal veterinary surgeries.

The Directors believe that the Proposed Acquisition is a good fit both operationally and geographically. The acquisition of the Wey Referrals business should provide an opportunity to increase the level of referrals generated within the Group. Greendale represents a good geographical and operational fit with CVS's existing business.

Following the Proposed Acquisition and integration of the two businesses, the Enlarged Group is expected to operate 197 veterinary surgeries, have approximately 2,000 staff and increase its market share to approximately 8 per cent. The Directors believe that the scale, market presence and revenue diversification of the Enlarged Group will facilitate growth and improve financial performance.

The Directors, working with the key management of VET, believe that the adoption of the Group's business model will enable revenue growth and margin improvement over time as has been the case with its historical acquisitions, in particular, through utilisation of the Group's central services and its buying terms. Other than transaction costs the Directors do not anticipate any significant exceptional costs from integrating the VET Group.

Accordingly, the Board believes that the Proposed Acquisition will be earnings-enhancing in the first full financial year of ownership following Completion, with further opportunities for earnings enhancement going forward through revenue and cost synergies, by organically growing the business and improving margins.

Following completion of the Proposed Acquisition, the Board intends to continue its strategy of evaluating additional, selective acquisition opportunities that emerge.  It is currently intended that internally-generated cash will allow the Group to make future acquisitions of specific, known targets as well as anticipated pipeline opportunities, yet to be identified.

Details of the Proposed Acquisition

Pursuant to the Acquisition Agreement which is conditional only (i) on the passing by Shareholders of the Resolutions and (ii) on the Placing Agreement not having been terminated by Brewin Dolphin and having become and remaining unconditional in all respects (save only as to fulfilment of the conditions relating to Admission and Completion), the Vendors will, at Completion, sell and CVS (UK) will buy the entire issued share capital of Veterinary Enterprises. In the event that these conditions are not satisfied, CVS (UK) may terminate the Acquisition Agreement which will, without prejudice to any accrued rights or obligations, be of no further effect save for certain Vendor legal fee reimbursements, which the Directors believe to be immaterial in the context of the acquisition consideration.

The Vendors have undertaken to ensure that, pending Completion, the businesses of the VET Group will be carried on in the ordinary and usual course and in the same manner as prior to the date of the Acquisition Agreement.

After Completion, and following receipt by CVS of the Placing Proceeds, the Vendors will be paid the Consideration in cash. An exercise to determine the net asset value of the VET Group on the date of Completion (subject to certain agreed adjustments) will be carried out as soon as reasonably practicable but, in any event, within 60 days after delivery of VET's January management accounts. The Acquisition Agreement contains a mechanism to ensure that any movement in net liabilities (excluding goodwill) in excess of £50,000 between the balance sheet at 30 September 2009 and the balance sheet at the date of completion, will result in an appropriate payment being made or received by CVS (UK).

Certain of the Vendors have given warranties and indemnities to CVS (UK) customary for a transaction of this nature. The maximum aggregate liability of those Vendors under the warranties and indemnities will be an amount equal to the Consideration, as adjusted. Subject to certain limitations, CVS (UK) will be able to bring claims for breach of any warranty in respect of which the aggregate amount of the claim exceeds £75,000 up to the date which is 18 months from the date of Completion.  Claims in respect of tax may be brought up to the seventh anniversary of Completion.

Only one of the Vendors will remain an employee of the VET Group after Completion. The two departing Vendors have undertaken that, except with the consent of CVS (UK), they will not for a period of 3 years from Completion, inter alia, carry on or be engaged, concerned or interested in the operation of a business with a view to the consolidation, acquisition, merger or amalgamation of veterinary practices and/or veterinary laboratories within the United Kingdom nor solicit or entice away from the VET Group or offer to employ or otherwise engage any of its directors or senior employees.

Details of the Placing

The Company is proposing to raise approximately £9.0 million (approximately £8.6 million net of Placing expenses) by way of a placing of 4,736,842 New Shares to help fund the Proposed Acquisition. The Placing Price of 190 pence per New Share represents a discount of approximately 2.8 per cent. to the Closing Price of 195.5 pence per Ordinary Share on 18 February 2010 (being the last Business Day prior to the announcement of the Proposed Acquisition).  Under the terms of the Placing Agreement, Brewin Dolphin, as agent for the Company, has agreed to use all reasonable endeavours to procure placees for the New Shares at the Placing Price or, failing which, itself to subscribe for the New Shares at the Placing Price.  The New Shares will represent approximately 8.41 per cent. of the Enlarged Share Capital.

The Board, having been advised by Brewin Dolphin, consider that it is in the best interests of the Company and Shareholders as a whole for the funds required for the financing of the Proposed Acquisition to be raised by the Placing. It is believed that the significant costs, both financially and in terms of management time, of producing a full prospectus, which would be required if the Company were to offer all Shareholders the opportunity to acquire new shares in the Company (e.g. via an open offer or a rights issue), are such that a non-pre-emptive placing with a limited number of institutional and other investors is a more appropriate method of raising finance in this instance.

The Company therefore seeks from Shareholders the flexibility to raise finance by means of issuing new equity without pre-emption for existing Shareholders. At the General Meeting we seek approval of various resolutions to provide this flexibility.

The Placing is conditional, inter alia, upon:

(iii)    the Resolutions being passed without amendment;

(ii)     the Placing Agreement becoming unconditional in all respects (save for Admission) and it not having been terminated; and

(iii)    admission of the New Shares to trading on AIM becoming effective by not later than 8.00 a.m. on 11 March 2010 (or such later time and date as the Company and Brewin Dolphin may agree, not being later than 8.00 a.m. on 25 March 2010).

The Placing Agreement contains certain warranties (subject to limitations which are normal for an agreement of this type), given by the Company in favour of Brewin Dolphin as to certain matters relating to the CVS Group and its business. In addition, the Company has given certain undertakings to Brewin Dolphin and has agreed to indemnify Brewin Dolphin in relation to certain liabilities it may incur in respect of the Placing.  Brewin Dolphin has the right to terminate the Placing Agreement in certain circumstances prior to Admission including, inter alia, (i) for certain force majeure events or other events involving certain material adverse changes relating to the CVS Group or (ii) in the event of a material breach of the warranties or other obligations of the Company set out in the Placing Agreement.

The Company has agreed to pay to Brewin Dolphin a placing and underwriting commission together with certain costs and expenses incurred in connection with the Placing.

Application will be made to the London Stock Exchange for the New Shares to be admitted to trading on AIM. Subject to, inter alia, the Resolutions being passed by the requisite majority at the General Meeting, it is expected that Admission will become effective and that trading in the New Shares will commence on AIM at 8.00 a.m. on 11 March 2010.

The New Shares will, when issued and fully paid, rank pari passu in all respects with the existing Ordinary Shares, including the right to receive any dividend or other distribution declared, made or paid in respect of the Ordinary Shares after Admission.

It is expected that the New Shares will be delivered in CREST on 11 March 2010 and that (where appropriate) share certificates for the New Shares to be held in certificated form will be despatched by first class post by 15 March 2010.

General Meeting

A General Meeting will be held at the offices of DLA Piper UK LLP at 3 Noble Street, London EC2V 7EE at 10.30 a.m. on 10 March 2010.

Recommendation

The Directors believe that the approval of the Resolutions is in the best interests of the Company and its Shareholders as a whole. Accordingly, the Directors are recommending that you vote in favour of the Resolutions at the General Meeting as they intend to do in respect of 1,400,256 Ordinary Shares held, directly or indirectly, by them, representing approximately 2.72 per cent. of the Existing Share Capital.

EXPECTED TIMETABLE OF PRINCIPAL EVENTS

	2010
Announcement of the Proposed Acquisition and posting of the Circular and Forms of Proxy	19 February
Latest time and date for receipt of Forms of Proxy	10.30 a.m. on 8 March
General Meeting	10.30a.m. on 10March
Expected date for Admission and commencement of dealings in the New Shares	11 March
Expected date for CREST accounts to be credited in respect of the New Shares	11 March
Expected date for completion of the Proposed Acquisition	11 March
Expected date for despatch of definitive certificates in respect of the New Shares to be held in certificated form	15 March

(1)           Each of the times and dates set out in the above timetable and mentioned throughout this announcement are London times unless otherwise stated and are subject to change.

ADMISSION AND PLACING STATISTICS

Placing Price per New Share	190 pence
Number of Ordinary Shares in issue as at the date of this document	51,563,475
Number of New Shares being issued	4,736,842
Number of Ordinary Shares in issue immediately following Admission(2)	56,300,317
Approximate gross proceeds of the Placing to be received by the Company, before expenses	£9.0 million
New Shares as a percentage of the Enlarged Share Capital(2)	8.41%
Approximate estimated proceeds of the Placing to be received by the Company, net of expenses (including VAT) relating to the Placing	£8.6 million

(2)           Assumes no Ordinary Shares are issued between the date of this announcement and Admission.

 

END

 

 

MSCQKLFFBLFFBBD