Fairfax Adopts Pet Insurer for $92M

NEW YORK (The Deal) -- Canadian financial institution Fairfax Financial Holdings announced Tuesday it had acquired pet insurer Pethealth for C$100 million ($92 million), expanding its footprint in the burgeoning field of pet-related animal health.

"Fairfax had some business in that space and they've added to that business with this deal," said RBC Capital Markets analyst Mark Dwelle, who covers Fairfax, by phone. "It sort of came out of nowhere, but most of [Fairfax's] deals are very opportunistic. The price seemed reasonable and I think they looked at it and found value."

In May 2013, Toronto-based Fairfax acquired Hartville Group, of Canton, Ohio, which also provides pet insurance, for undisclosed terms. "I suspect [Pethealth] will be rolled into that existing business," Dwelle said. "It seems like a deal to add another client book."

The C$2.79 per share in cash that Fairfax will pay represents a 26% premium over Oakville, Ontario-based Pethealth's Aug. 29 closing price of C$2.21 per share and a 69% premium to Pethealth's closing price of C$1.65 per share on Aug. 15, which was the day before it went on the block.

Shares of Pethealth, which trade on the Toronto Stock Exchange as PTZ, jumped about 26% to C$2.78 per share Tuesday.


The C$100 million deal is about 2.4 times Pethealth's 2013 revenues of C$42.2 million and equates to about 17 times Pethealth's projected 2014 Ebitda of C$5.8 million, according to data provided by Bloomberg.

Bryan Jaffe, an investment banker at Seattle's Cascadia Capital who has worked on numerous deals in the pet industry, said the premium and multiple for the deal weren't unexpected. "For a traditional financial services company to justify paying a significant premium is not hard because of the general growth impetus around animal health," he asserted.

Jaffe referenced a number of deals in the pet health space in recent years, including Nestle Purina PetCare's Jan. 16 acquisition of Durango, Colo.-based premium pet treats business Zuke's for undisclosed terms and pet insurer Trupanion  (TRUP) 's July debut on the New York Stock Exchange, which raised about $71 million.

"Nestle Purina's acquisition of Zuke's was about 2.4 times revenues," according to Jaffe, who advised Zuke's on the transaction. "Trupanion traded well in its debut even though it is still having profit issues. Pet-related deals seem to always be at the top end of that consumer range."

Pethealth benefited not only from past deals, but its own growth prospects, as well.

For the sixth months ended June 30, Pethealth, which also runs the largest network of pet adoption agencies in North America, saw revenue increase 28%, to C$25.7 million ($23.6 million), in the first half of 2014 compared to C$20.1 million in the first half of 2013. The company had Ebitda of C$2.2 million for the six months ended June 30.

For Pethealth, the sale to Fairfax ends a short auction process that started Aug. 19 when the company officially announced it had hired a financial adviser to conduct a strategic review. While the bankers weren't revealed at the time, The Deal has learned that Raymond James & Associates' (RJF)  Dan Fairweather and Gig Palmer lead the advisory team.


While bidders such as Los Angeles-based VCA (WOOF)  or Phoenix-based Petsmart  (PETM) were rumored to be among those interested in Pethealth, ultimately it was Fairfax, a pure-play financial services player, that took Pethealth.

"Ultimately I thought that Fairfax - being a sort of tier 2 insurance provider - did the deal mainly for the growth impetus in the pet industry," said Cascadia's Jaffe. "They need to look at more insurance products to compete with the big guys."

Pethealth said in a statement that the deal, which has already been approved by 50.9% shareholders, including Burgundy Asset Management Ltd. and director Richard J. Renaud, is expected to close in the fourth quarter of 2014. Burgundy and Renaud hold a combined 36.4%.

If the deal is terminated, Pethealth is required to pay a C$3.5 million breakup fee.

Fairfax's vice president of corporate development John Varnell and Pethealth's CFO Glen Tennison didn't return calls.

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