Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

What's better than chocolate? Puppies.

No, seriously -- and  Mars Inc. knows it. That explains the Milky Way maker's pivot toward pet care, including the deal it struck Monday for veterinary-care company VCA Inc.

Sales growth in the candy market, including chocolate treats, is getting tougher to come by, particularly in the U.S. The $13.7 billion of chocolate candy sold in the year through Dec.4 was up just 1 percent  from the year-earlier period, while volume was down 0.6 percent, according to Information Resources data compiled by Bloomberg Intelligence. Pet food, on the other hand, is the food industry's most-promising category, with Euromonitor International forecasting a 2.5 percent compound annual growth rate for the next five years, compared with 1.3 percent for packaged foods overall.

Raining Cats And Dogs
Mars, known for candy brands such as M&M's, is acquiring VCA Inc. to expand further into the growing pet-care industry. Here's how U.S. pet owners spent their money last year:
Source: American Pet Products Association Inc.

More broadly, pet-related spending in the U.S. is estimated to have surged to $62.8 billion last year, up more than 60 percent from a decade ago, according to the American Pet Products Association. A quarter of that money goes toward veterinary care. Globally, Euromonitor pegs the fast-growing pet-care market at nearly $104 billion and vet services at more than $75 billion.

See Spot Eat...Your Wallet
Manufacturers of human food and clothes may be struggling to grow sales -- but not pet-care companies. Americans are spending more than ever on their four-legged friends:
Source: American Pet Products Association Inc.

This makes it easier to understand why McLean, Virginia-based Mars is paying what at first blush looks like a pretty high price for VCA. The $9.1 billion deal value (including debt) works out to about 19 times its trailing 12-month Ebitda and 3.8 times its revenue. Those exceed the median multiples that similar-sized U.S. acquisition targets broadly and hospitals specifically have fetched in the past few years. Also, the $93-a-share takeover offer is 38 percent higher than VCA's 20-day average -- a relatively large premium. 

Or is it? 

Mars may be recognized more for its M&M's, Snickers bars and Wrigley candy products, but the company also has a long history in pet products (it already held an 18 percent share of the global pet-care industry as of 2015, according to  Euromonitor). The privately held company owns pet-food brands Whiskas, Pedigree and Royal Canin, as well as veterinary-services businesses such as Banfield Pet Hospitals. Together, those make up a division that generates the second-biggest chunk of its roughly $35 billion of annual revenue.

VCA will give Mars an even bigger presence in the pet-health market. Its animal hospitals had about 9.8 million patient visits in 2015, while its labs provided diagnostic testing for more than 17,000 clients, according to the company's last annual filing. It also franchises doggy day-care facilities called Camp Bow Wow. More important, VCA's sales are more than you can shake a paw at:

Reason to Buy
Revenue has accelerated at pet-care company VCA, which may justify Mars's rich takeover offer
Source: Bloomberg

After this deal closes, pet care will be Mars's biggest business. And it's a good time to be making that shift. 

The down side to this transaction? VCA having to give up its adorable ticker symbol: WOOF. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net