It was just last week that the world first heard the name Covetrus. This week, Henry Schein(HSIC) filed a registration statement for HS Spinco, the Animal Health business it will be spinning off to merge in a Reverse Morris Trust transaction with Vets First Choice to form Covetrus. Covetrus stock is expected to trade on NASDAQ under the ticker CVET.
Henry Schein shareholders will own 63% of the combined company which will have $1.175 Billion in debt. The cash raised will be used, largely, to pay a huge dividend to Henry Schein. It may prove quite difficult for the company with a 2017 pro forma loss of over $10 million to service this heavy load.
Though the company already weighs in at an impressive $3.7 billion in pro forma revenue, half of which comes from the sale of pharmaceuticals, there may still be room for significant growth:
The global animal health market, which includes pharmaceuticals, supplies and services, and veterinary and other healthcare, is a growing industry. Based on industry analysts’ estimates, the global animal health market was in excess of $150 billion in 2017, including approximately $30 billion of pharmaceuticals sold by manufacturers. Pharmaceuticals represented more than 50% of our pro forma net sales in fiscal 2017. Based on domestic industry estimates, overall pet spending in the United States increased approximately 4%, to approximately $70 billion, from 2016 to 2017, with food representing approximately 42%, veterinary care representing approximately 25% and pet supplies and medications representing approximately 22%.
| Dollars in thousands, except per share amounts | Nine Months Ended September 29, 2018 |
Year Ended December 30, 2017 |
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| Pro Forma Condensed Combined Results of Operations Data: | ||||||||
| Net sales | $ | 3,032,396 | $ | 3,709,390 | ||||
| Gross profit | 587,635 | 703,073 | ||||||
| Restructuring costs | 7,788 | — | ||||||
| Operating income (loss) | 10,716 | 10,202 | ||||||
| Income tax (expense) benefit | 1,640 | 40,706 | ||||||
| Net income (loss) | (35,725 | ) | (11,255 | ) | ||||
| Net income (loss) attributable to the Combined Company | (36,622 | ) | (18,316 | ) | ||||
| Earnings per common share | ||||||||
| Basic | (0.32 | ) | (0.16 | ) | ||||
| Diluted | (0.32 | ) | (0.16 | ) | ||||
| Weighted average common shares outstanding | ||||||||
| Basic | 113,453,686 | 113,453,686 | ||||||
| Diluted | 113,453,686 | 113,453,686 | ||||||
| Dollars in thousands | As of September 29, 2018 |
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| Pro Forma Condensed Combined Balance Sheet Data: | ||||||||
| Cash and cash equivalents | $ | 59,641 | ||||||
| Total assets | 3,778,771 | |||||||
| Long-term debt and capital leases | 1,175,432 | |||||||
| Total liabilities | 1,869,722 | |||||||
| Redeemable noncontrolling interests | 91,637 | |||||||
| Total equity | 1,817,412 | |||||||
Recent market volatility may portend fundamental economic weakness. This may create a challenging environment for Covetrus that would negatively impact its ability to become profitable and service its debt. On the other hand, Henry Schein, flush with over $1 billion cash from the special dividend, and consistently delivering significant profits, may look quite attractive.
Disclosure: Author holds no position in any stock mentioned
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