FTC Clears Animal Hospital Deal With Divestitures

On August 30, 2017, the Federal Trade Commission (“FTC”) announced that Mars, Incorporated (“Mars”)  agreed to divest 12 specialty or off-hours emergency animal hospitals around the United States to settle FTC allegations that Mars’s $9.1 billion acquisition of pet care company VCA Inc. (“VCA”) would violate federal antitrust laws.

Competition Problem

The animal hospital industry is highly fragmented and very crowded.  For the most part, the FTC found that there were really very few antitrust concerns with the deal so there was much in terms loss of competition.  Overall, the combined entity would own roughly 6.5% of the North American market (26,000 animal hospitals) in terms of locations.  While a 6% share of the national or North American space is by no means troubling, problematic overlaps could nevertheless exist in smaller local markets.  Indeed, the primary factors influencing a customer’s selection of an animal hospital are convenient location and hours, personal recommendations, reasonable fees and quality of care.

According to the FTC’s complaint, however, the acquisition substantially lessens competition for certain specialty and emergency veterinary services in 10 local markets by eliminating head-to-head competition between Mars and VCA.  Without a remedy, the deal would likely lead to higher prices for pet owners and lower quality in specialty and emergency veterinary services.  The FTC also found that entry sufficient to mitigate any anticompetitive effects are unlikely because opening a specialty or emergency services veterinary clinic presents is difficult.  Indeed, while there is an abundance of competition with regards to general practice veterinarians, to open a specialty or emergency services clinic, requires specialist veterinarians with greater training.

Settlement Agreement

Under the settlement, Mars is required to divest each of the 12 clinics to three separate divestiture buyers: National Veterinary Associates, Pathway Partners Vet Management Company (“Pathway”) and PetVet Care Centers (“PetVet”).  One clinic each in the Kansas City, New York, and Phoenix areas will be divested to National Veterinary Associates.  One clinic each in Chicago, Corpus Christi and San Antonio, and two clinics in Seattle, will be divested to Pathway.  And two clinics serving the Portland area and two clinics in the greater Washington, DC area will be divested to PetVet.  Mars and VCA must also secure all third-party consents, assignments, releases, and waivers required to permit the buyers to conduct business at the divested clinics, and provide reasonable financial incentives to key employees to continue in their positions.  Also, for a year after the order takes effect, Mars is prohibited from entering into contracts with any specialty or emergency veterinarian affiliated with a divested clinic.  Mars is also required for 10 years to notify the FTC if it plans to acquire any additional specialty or emergency veterinary clinics in certain geographic areas.  The FTC has approved Thomas A. Carpenter, D.V.M. as the Interim Monitor.  He will be responsible for overseeing the divestiture process.

Observations

The FTC’s merger enforcement action demonstrates that the FTC will define markets narrowly to protect consumers of specialty and emergency veterinary services in 10 local markets.  It also illustrates that the FTC is willing to add behavioral conditions to strengthen its structural remedies.  Here, the FTC wanted to make sure that the divestiture buyers obtain not just the clinics but consents, waivers, releases, and assignments necessary to operate the divested clinics as well as prohibiting the merged firm from not poaching the divestiture buyers’ specialty or emergency veternarians.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com