Greencross proposes a merger with Petbarn and Animates operator

Greencross proposes a merger with Mammoth Pet Holdings

The merger would combine pet specialty stores with veterinary services.

Darryl Daté-Shappard

I started investing after finding a copy of Peter Lynch's "Beating the Street" in the English book section of a library in Japan, where I was living at the time in 1997. Seeing that regular people can find investment ideas just as easily as professionals, I used the philosophy of that book to invest in stocks in Japan, and later in Australia after moving in 2001. I also have experience in property investing, and went on to complete my masters degree in Applied Finance at QUT in Brisbane. I follow the investment style of Peter Lynch, Phillip Fisher and Warren Buffett-- knowing what you invest in, doing your homework to keep up with a stock's story and holding a healthy skepticism of what the stock market calls "value".

Published November 18, 2013 6:01 am AEDT

Veterinary services company Greencross (ASX: GXL) has just announced a merger agreement with Mammoth Pet Holdings, which operates 100 Petbarn pet specialty stores in Australia, and — through a 50:50 joint venture with EBOS Group (NZ: EBO) — 24 Animates pet specialty stores in New Zealand.

The proposed merged company would be an attractive combination of pet care and services in an industry with a combined addressable market of about $7 billion in Australia. One of the benefits for Greencross is access to Mammoth Pet Holdings' 1.1 million member "Friends for Life" loyalty program, which it can use to market its veterinary services.

Similar to the veterinary services market, the pet care market is highly fragmented, and it offers distinct growth opportunities for further expansion across Australia.

The scrip-for-scrip offer will have Greencross issue about 52.6 million shares to Mammoth shareholders, which will represent 58.25% of the merged company's share register. Once combined, projected revenue for FY2014 is $443 million, and net profit after tax is expected to be about $21 million. In comparison, by itself Greencross' 2014 forecasted revenue is $131 million and forecasted NPAT is $9 million, so considerable scale would be added.

Both companies are growing quickly, with Mammoth increasing its stores from 74 in 2011 to 114 in 2013. It plans to increase that to 138 in FY2014. Similarly, over the same period, Greencross has gone from 59 clinics to 93, and it expects to increase that to 100 in FY2014.

In FY2013, Mammoth was able to achieve 8.5% like-for-like sales growth, well above the 2.3% average like-for-like sales growth of ASX-listed retailers and consumer staples companies. Sales in prepared pet food and products have grown by a compound annual growth rate of 5% over 2009-2012, the same as it has over the past nine years, so a stable growth trend is in place.

Foolish takeaway

Both companies with their strong expansion programs would be of interest to investors looking for retail chains to grow their returns. Combined, we can see that the synergies and cross-business opportunities could keep the growth going for years.

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