Greencross takes on Mammoth purchase

Greencross has turned to the $7 billion pet-supplies sector with a $330 million scrip deal that more than doubles the size of the entity.

Having acquired a string of vet practices and then a pet cemetery to bury its mistakes, the Brisbane-based consolidator has turned to the $7 billion pet-supplies sector with a $330m scrip deal that more than doubles the size of the entity.

Greencross (GXL, $6.30) says it's acquiring the private Mammoth Pet Holdings, which owns the Petbarn chain here and Animates in New Zealand, by issuing just over 52m of its shares to the owners.

Greencross is already the biggest owner of vet clinics and the deal delivers a 4 per cent share of the lucrative supplies end of the market, with an ambition to grow this share to 20 per cent.

Given Greencross managing director Glen Richards and director Jeff David are Mammoth owners, the deal was separately appraised and endorsed by the three other Greencross directors, including chairman Andrew Geddes.

The deal is also subject to approval of more than 50 per cent of Greencross holders.

Combined, the merged entity covers 124 "big box" style stores and 100 vet clinics. In the current year it is forecast to generate more than $440m of revenue and $50m of ebitda.

Mammoth itself is forecast to generate $312m of revenue in the current year, for ebitda of $34m which implies the deal is struck on a multiple of just under 10 times.

Even a blind labrador can see the potential of the vertical integration in terms of both revenue and cost savings.

For instance, Petbarn has 1.1 million members of its "Friends for Life" frequent-flyer style program, who can be offered favourable vet deals.

Synergies arise from sharing marketing and other functions and "harmonising" procurement terms.

"The board believes that pro forma 2013-14 annualised cost savings of $1.5m are realisable, with significant further potential upside from both cost and revenue synergies in future years," Greencross says.

Greencross expects the deal to be earnings per share positive in the current year, with "double-digit EPS accretion" in 2014-15 relative to consensus market estimates (of 28.6c per share).

As is usually the case with chunky acquisitions, Greencross shares (which have run hard since June) took a 20c breather today. But bear in mind rumours of the deal emerged in October.

Criterion last rated Greencross a long-term buy at $4.70 on June 21, after the company acquired the Pet Cemetery and Crematorium in Greenbank for $1.45m.

That one was a poodle of a purchase; this one's the Great Dane. Criterion will ponder whether or not it delivers enough chunk-sized bites of goodness to investors.

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