David Rosenthal: belief

Transcript context

…Which is even bigger, right? Yes. They were the largest independent vet hospital operator in America for $9 billion, so a large acquisition. Ben, like you say, there are two interesting things about getting into this business. It’s a super different business. We’re talking about a services business. This is not manufacturing, so very different DNA. I think a big part of the strategy, though, like you said about distribution of pet food, in 2002, Mars had bought a French pet food company called Royal Canin, or I’ve also heard it pronounced Royal Canin. Royal Canin makes prescription pet food, especially for an aging dog or a mobility challenge dog. As dogs became more and more family members and people started caring for them more and more like humans, prescription pet food became a really big business. I think Royal Canin was a grand slam acquisition for the company. I think that’s partially what led them to then get involved with Banfield and VCA of, oh, let’s consolidate a lot of the distribution and value chain here in this prescription pet food business. Pretty interesting. It’s a very different business, but they run so decentralized that it’s probably okay that it’s a services business. You’re not having people who are making candy trying to run a veterinary clinic. It’s a pretty small head office, and it’s a very decentralized operation. I think the decision-making authority really rests with the board still, but these independent operating groups are independent operating groups. I’ll pull a playbook theme forward, which is that this company obviously grows through inorganic acquisitions. In buying Wrigley, Royal Canin, VCA, all these, Mars itself, they’ve overpaid on a price to earnings basis. Wrigley was a 35x and a 27% premium over the public valuation. Royal Canin was a 39x. If you think about, especially with Banfield Pets Hospitals, they really understood what they were buying. They were able to underwrite better than anyone else. I think this is very similar to the idea that Ho Nam shared with us way back in our 2021 episode, which is that multiples are a blunt instrument used for valuation when you don’t actually deeply know and understand the business. When you do, you can just underwrite better than everyone else. You have more margin of safety in the price that you are willing to pay than the rest of the market does. When they want to come in over the top at a 35x for Wrigley, maybe they know more about Wrigley than other bidders do.…

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