 | Proposed Acquisition of XLNT Veterinary Care, Inc. (dba Pet DRx) |
| by | |
 | Echo Healthcare Acquisition Corporation |
September 5, 2007 |
Presentation Agenda |
- Additional Information and Cautionary Language
- Executive Summary
- Valuation
- Animal Health Industry
- Company's Business
- Financial Review
September 5, 2007
1
Additional Information |
Echo Healthcare Acquisition Corporation is holding presentations for certain of its stockholders, as well as other persons who might be interested in purchasing Echo securities in connection with a conference presented by Roth Capital Partners September 5-6, 2007. This presentation is filed with the Securities Exchange Commission pursuant to Rule 425.
Echo has filed a Registration Statement on Form S-4 with the Securities and Exchange Commission in connection with its pending merger with XLNT Veterinary Care, Inc. (“Pet DRx”), and expects to mail a proxy statement/prospectus to Echo stockholders after the Registration Statement is declared effective by the SEC. You are advised to read the final proxy statement/prospectus carefully when it becomes available because it will contain important information about Echo, Pet DRx, and the merger. You can obtain the preliminary proxy statement/prospectus, the final proxy statement/prospectus when it becomes available, and Echo’s other filings with the SEC free of charge at the SEC’s web site at www.sec.gov, or by directing a written request to: Corporate Secretary, Echo Healthcare Acquisition Corp., 8000 Towers Crescent Drive, Suite 1300, Vienna, VA 22182.
Echo, Pet DRx and their directors, executive officers, affiliates, and Roth Capital Partners and Morgan Joseph & Co. Inc. may be deemed to be participants in the solicitation of proxies for the special meeting of Echo’s stockholders to be held to approve the transaction. The interests of solicitation participants and those who may be deemed participants in the proxy solicitation will be described in the proxy statement/prospectus with respect to the merger. Such interests may include potential fees to Morgan Joseph and Roth, employment relationships, potential membership on the Echo Board of Directors, option and stock holdings and indemnification.
A registration statement relating to the securities to be offered in the merger has been filed with the SEC but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This material shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.
September 5, 2007
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Cautionary Language re: Forward-Looking Statements |
Except for the historical information contained herein, certain matters discussed in the accompanying presentation, including statements as to the expected benefits of the combination of the two companies, future product and service offerings, expected synergies, and timing of closing, are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially, including, but not limited to, the satisfaction of conditions to closing of the proposed merger, including the risk that stockholder approval might not be obtained in a timely manner or at all, the ability to successfully integrate the two companies and achieve expected synergies following the merger, the ability of the combined company to successfully acquire, integrate and operate veterinary hospitals and clinics, requirements or changes affecting the businesses in which Pet DRx is engaged, veterinary services trends, including factors affecting supply and demand, dependence on acquisitions for growth, labor and personnel relations, changing interpretations of generally accepted accounting principles and other risks detailed from time to time in the SEC reports of Echo, including its Form 10-K and 10-Q filings, and its Form S-4 filed with the SEC. These forward-looking statements speak only as of the date hereof. Echo disclaims any intention or obligation to update or revise any forward-looking statements.
September 5, 2007
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| Executive Summary | |
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Overview of Pet DRx Merger |
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12 months ended | 3 months ended | ||
December 31, 2006 | March 31, 2007 | ||
| Revenue | $17.4 million | $10.7 million | |
| Pro Forma Revenue | $70.3 million | $17.4 million |
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*Net of estimated income taxes.
September 5, 2007
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Investment Rationale |
September 5, 2007
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Transaction Terms |
- Date of Definitive Agreement: September 11, 2006; amended February 16, 2007
- Market Capitalization: Pro forma capitalization will include:
| Current Echo Shares Outstanding | Shares Issued for Pet DRx Common Stock* | Shares Issued for Pet DRx Options, Warrants, and Convertible Debt* | Post Merger Fully-Diluted Shares Outstanding | Share Price (8/24/07) | Post Merger Market Capitalization | |||||
| 8,750,000 | + | 15,921,781 | + | 2,019,398 | = | 26,691,179 | X | $7.75 | = | $206.9 million |
- Transaction Value = $123.3 million
2X 2006 Pro Forma Revenue up to $60 million | 1.15X 2006 Pro Forma Revenue Beyond $60 million | Value Before Excess Debt | Excess Debt* | Transaction Equity Value | ||||
| $120.0 million | + | $12.3 million | = | $132.3 million | - | $9.0 million | = | $123.3 million |
- Conditions to Closing:
| -- | Shareholder approval; less than 20% of Echo stockholders requesting redemption | |
| -- | Customary closing conditions for transactions of this nature |
* Assumes conversion of $8.9 million of Pet DRx convertible debt prior to the merger, although such conversion is not mandatory
September 5, 2007
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Pro Forma Ownership |
Assuming No Exercise of Echo Warrants | Assuming Full Exercise of Echo Warrants | |
 |  |
__________
(1) Based on Robert Wallace’s stock and option ownership as of June 15, 2007.
September 5, 2007
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Key Executives |
- Gene Burleson – Chairman of the Board
– Served as Chairman for numerous health care companies
– Served as CEO and Chairman of the Board for GranCare from 1990-1997 - Zubeen Shroff – Vice Chairman, Director
– Joined Pet DRx in February 2006, became Chairman in March 2007
– Currently serves as director of ONI Medical Systems and Aperio Technologies - Robert Wallace – Chief Executive Officer, Director
– Joined Pet DRx at its inception in 2004 and served as Chairman of the Board from 2004 to November 2006
– Founded Pets Rx in 1993 and served as its Chairman until it was sold to VCA Antech in 1996 - Steven Johnson – President, Chief Operating Officer, and Director
– Joined Pet DRx in July 2007
– Previously served as President of Fresenius Medical Care North America - George Villasana – General Counsel, Secretary
– Joined Pet DRx in June 2007
– Previously served as Senior Corporate Counsel of AutoNation - Dr. Stephen Ettinger– Chief Medical Officer
– Joined Pet DRx in March 2007
– Previously served as director of California Animal Hospital Veterinary Specialty Group
September 5, 2007
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| Valuation | |
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Comparable Public Companies in the Healthcare Market |
| ($ millions, except per share data) | ||||||||||||||||
Price 8.24.07 | Enterprise Value | LTM | LTM Margins | 3 Yr. | LTM CAGR (1) | Enterprise Value / LTM | ||||||||||
| Company | Sales | EBITDA | Sales | EBITDA | Sales | EBITDA | ||||||||||
| Animal Healthcare Services | ||||||||||||||||
| VCA Antech Inc. (WOOF) | $ 39.14 | $ 3,786 | $ 1,059 | 22.9% | 20.8% | 21.2% | 3.6 x | 15.6 x | ||||||||
| Animal Health Product Suppliers | ||||||||||||||||
| Petsmart Inc. (PETM) | $ 34.10 | $ 4,810 | $ 4,334 | 11.7% | 11.9% | 13.3% | 1.1 x | 9.5 x | ||||||||
| IDEXX Laboratories Inc. (IDXX) | 108.00 | 3,345 | 828 | 21.0% | 17.1% | 15.8% | 4.0 x | 19.2 x | ||||||||
| MWI Veterinary Supply, Inc. (MWIV) | 35.88 | 419 | 681 | 4.1% | 21.1% | 32.0% | 0.6 x | 14.9 x | ||||||||
| PetMed Express Inc. (PETS) | 15.72 | 338 | 171 | 14.3% | 19.9% | 33.0% | 2.0 x | 13.9 x | ||||||||
| Animal Health International, Inc. (AHII) | 11.31 | 389 | 617 | 6.1% | N/A | N/A | 0.6 x | 10.3 x | ||||||||
| Heska Corp. (HSKA) | 2.05 | 109 | 82 | 9.6% | 21.1% | 32.1% | 1.3 x | 13.9 x | ||||||||
Pro Forma Fiscal 2006 | ||||||||||||||||
Sales | EBITDA | |||||||||||||||
| Pet DRx (pro forma post-merger)(2) | $ 7.75 | $ 176 | $ 70 | N/M | N/A | N/A | 2.5 x | N/M | ||||||||
| Animal Healthcare Services: | ||||||||||||||||
| VCA Antech Inc. (WOOF) | $ 3,786 | $ 1,059 | 22.9% | 20.8% | 21.2% | 3.6 x | 15.6 x | |||||||||
| Animal Health Product Suppliers Companies: | ||||||||||||||||
| Median | $ 404 | $ 649 | 10.7% | 19.9% | 32.0% | 1.2 x | 13.9 x | |||||||||
| Mean | 1,568 | 1,119 | 11.2% | 18.2% | 25.2% | 1.6 x | 13.6 x | |||||||||
__________
Source: Capital IQ
(1) Historical results have not been adjusted to reflect the discontinuation of goodwill amortization.
(2) Assumes fully-dilluted post merger shares outstanding of 26.69 million (8.75mm Echo + 17.94mm Newly Issued = 26.69mm), and Pro Forma Revenue of $70.3 million as of 12/31/06.
September 5, 2007
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Comparative Multiple Analysis |
__________
(1) Market Comp is VCA Antech.
(2) Transaction Comp based on the transaction value / revenue multiple of VCA Antech’s acquisition of Healthy Pet, which was completed June 1, 2007.
September 5, 2007
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| Animal Health Industry | |
|
Large and Growing Market |
veterinary healthcare | Veterinary Healthcare Spending: 1991 - 2006 | ||
| – Demographic shift that supports a growing pet population – Increasing emphasis on pet health and wellness – Industry has more favorable economics than human healthcare – Medical technology previously used only on humans is migrating into animal care – Highly fragmented industry - the top five competitors in the industry own fewer than 6% of all veterinary hospitals |  | ||
U.S. Household Pet Ownership | |||
| Households with at least one pet | 69 million | ||
| Households with at least one dog | 43 million | ||
| Households with at least one cat | 38 million | ||
| Source: American Veterinary Medical Association. | Source: American Pet Products Manufacturers Association, Inc. |
September 5, 2007
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Increasing Focus on Pet Health Support Spending Trends |
- Increasing focus on pet wellness
– Roughly 70% of owners would pay “any amount” to save their pet’s life
– Pet ownership increased from 54% in 1994 to 63% in recent years
– Dog owning households spend almost 38% more on their dogs in 2001 than in 1996
– Spending on animal surgical visits doubled between 2000 and 2004 - Changing demographics are impacting demand for veterinary services
– The population of baby boomers will increase by 46% this decade
– Baby boomers own more pets and contribute to approximately one third of all pet care expenditures
Source: American Pet Products Manufacturers Association
September 5, 2007
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Animal Healthcare More Attractive than Human Healthcare |
 |  | |||
Animal Healthcare | Human Healthcare | |||
Payment Dynamics | Primarily cash pay |  | Complex process of billed charges | |
Government Reimbursement | None | | Cumbersome payment systems | |
Collections | Received at time of service; low bad debt | | Potential long wait times; high bad debt | |
Liability | Low liability profile; insurance premiums low | | Malpractice exposure with high premiums | |
Regulatory Environment | Mostly unregulated | | Highly regulated by state and Federal | |
Technology Impact | Migration of human technology to animals | | Fairly mature technology curve |
September 5, 2007
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Fragmented Veterinary Care Industry |
Number of AVMA Hospitals | Top 5 Operators Comprise < 6% of Hospitals | |
 |  |
September 5, 2007
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Opportunities Associated with Consolidation |
- 41% of veterinarians work in practices of only one or two veterinarians
– Less than 14% of veterinarians work in practices of seven or more veterinarians - Aggregators are capitalizing on the fragmented market
– Well capitalized providers able to acquire multiple-location facilities
– Larger providers able to support development of new medical technology for animal care
– Vets want to minimize time on administrative tasks and focus solely on practicing medicine
– Smaller practices find it more difficult to offer new, more complex services
__________
Source: Veterinary Survey by William Blair & Company, L.L.C.
September 5, 2007
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| Company's Business | |
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What Pet DRx Does |
- Pet DRx provides primary and specialty veterinary care services to companion animals through a network of fully owned veterinary hospitals
- Full range of medical treatments:
– Preventative care: • Vaccinations
• Examinations
• Spaying / neutering
• Dental care
– Specialized diagnostic/medical services: • X-ray
• Ultra-sound
• Internal medicine
• Surgery
• Cardiology
• Ophthalmology
• Dermatology
• Oncology
- Services are delivered through a regional “hub and spoke” system
– “Hub” is a specialty/emergency hospital providing specialized diagnostic/medical services
– “Spoke” is a traditional smaller general practice that performs primary and preventative care services
September 5, 2007
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Acquisition History |
- Pet DRx currently owns and operates 26 veterinary hospitals in northern and southern California
September 5, 2007
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Revenue and Margin Opportunities |
September 5, 2007
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| Financial Review | |
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Financial Review -- Historical Financial Challenges |
- While Pet DRx is currently building a dynamic veterinary industry platform, it is only three years old.
– At the end of the first quarter of 2006, Pet DRx operated just six facilities which generated approximately $2.7 million of revenue during the first quarter of 2006, and was staffed accordingly
– Since then, Pet DRx has grown at an incredible pace, and now owns 26 facilities generating approximately $70 million in pro forma 2006 revenue
– Pet DRx has achieved this without a corporate acquisition and integration team, and with a limited operations and finance team
• The Company is now making substantial progress on building that team, but the benefit of these personnel are not reflected in the recently reported results
– Pet DRx has experienced a higher than normal level of unusual expenses associated with the accounting for the merger with Echo, which has impacted operating results in a negative way
September 5, 2007
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Financial Review -- Pet DRx Historical Growth |
September 5, 2007
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Financial Review Pet DRx Operating Results |
Year Ended December 31, | Three Months Ended | |||||||||
2004 | 2005 | 2006 | 3/31/07 | |||||||
| ($ in thousands) | Actual (1) | Actual | Actual | Pro Forma(2) | Pro Forma(2) | |||||
| Revenues | $ 660 | $ 4,740 | $ 17,442 | $ 70,268 | $ 1 7,438 | |||||
| Cost of Revenue | 559 | 3,461 | 15,510 | 67,344 | 17,086 | |||||
| Gross Profit | 101 | 1,279 | 1,932 | 2,924 | 352 | |||||
| Operating Profit / (Loss) | (230 | ) | (1,034 | ) | (1,420 | ) | ( 428 | ) | (2,236 | ) |
| Net Loss | $ (275 | ) | $ (1,310 | ) | $ (1,868 | ) | $ (4,643 | ) | $ ( 3,270 | ) |
| Items Impacting Operating Profit / (Loss) and Net Loss: | ||||||||||
| Accounting and Audit Related Fees | $ - | $ - | $(585 | ) | $(585 | ) | $(1,236 | ) | ||
| Corporate Payroll, inc. Temps/Consultants | (113 | ) | (743 | ) | (1,244 | ) | (1,244 | ) | (493 | ) |
| Field Staff Costs | - | - | (139 | ) | (139 | ) | (83 | ) | ||
| Interest Income | 8 | 14 | 527 | 76 | 16 | |||||
| Interest Expense | (52 | ) | (200 | ) | (950 | ) | (4,266 | ) | (1,045 | ) |
__________
(1) Period from March 10, 2004 (inception) through December 31, 2004
(2) The Pro Forma adjustments give effect as if XLNT acquired these operations on January 1, 2006. In some instances where the acquisition occurred December 31, 2006 or during 2007, the Pro Forma adjustment reflects the results of operations for a twelve month period. Otherwise, the Pro Forma adjustment reflects the results of operations from January 1 to the date of acquisition.
September 5, 2007
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Financial Review - Demonstrated Accelerated Growth |
- PetDRx has demonstrated an ability to manage rapid growth as evidenced by its success in achieving pro forma revenues of over $70 million within in a three year period. In contrast:
– Over a nine year period beginning with its formation in 1986, VCA grew its revenues to approximately $67 million
– Over a nine year period beginning with its formation in 1996, Pets Choice grew its revenues to approximately $69 million
– Over a nine year period beginning with its formation in 1997, Health Pet grew its revenues to approximately $80 million
– Over an 11 year period beginning with its formation in 1996, NVA grew its revenues to approximately $120 million
September 5, 2007
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Financial Review Financial Improvement Opportunities |
- The $57.6 million cash from the merger should provide Pet DRx with the ability to approximately double in size
– Recently recruited operations team will help expand beyond “low hanging fruit” opportunities, including integration of new technology and expanded operations resulting from real estate rationalization
– The new integrations teams targeted by Pet DRx should allow earlier recognition of operational improvements in acquired facilities over time
– A permanent finance team should cost less, and the completion of the audits and merger should eliminate significant one time expenses
– The success in acquiring high profile practices has led to the establishment of programs that will enhance care and customer’s loyalty and experience
September 5, 2007
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Financial Review Pro Forma Balance Sheet |
As of March 31, 2007 | ||||||
| ($ in thousands) | Pro Forma Combined | |||||
| ASSETS: | ||||||
| Cash and Cash Equivalents | $ | 57,421 | ||||
| Other Current Assets | 3,333 | |||||
| Total Current Assets | 60,754 | |||||
| Fixed Assets, net | 8,636 | |||||
| Goodwill | 53,258 | |||||
| Other Assets | 9,314 | |||||
| Total Assets | $ | 131,962 | ||||
| LIABILITIES AND STOCKHOLDERS EQUITY: | ||||||
| Accounts Payable | $ | 3,367 | ||||
| Accrued Expenses and Other Current Liabilities | 4,476 | |||||
| Current Portion of Debt and Capitalized Lease Obligations | 2,803 | |||||
| Total Current Liabilities | 10,646 | |||||
| Long-Term Liabilities, Less Current Portion | 33,047 | |||||
| Total Liabilities | $ | 43,693 | ||||
| Total Stockholders’ (Deficit)/Equity | 88,269 | |||||
| Total Liabilities and Stockholders’ (Deficit)/Equity | $ | 131,962 | ||||
September 5, 2007
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