Schein On You Crazy Covetrus- Henry Schein Files Covetrus Registration Statement

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
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
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