16 April 2021
Apiam Animal Health’s share price falters with acquisitions
Apiam Animal Health first listed in December 2015 after an initial public offer at $1.00 and initially traded up to $1.38, reaching its highest ever share price of $1.80 on 26 August 2016. Since those heady days it has been a disappointment with a recent share price of 83.5 cents and has traded as low as 40 cents on 31 March 2020. This raises the question: why hasn’t Apiam powered on?
Apiam set out to acquire a dominant suite of rural veterinary practices and associated veterinary services. Among its purchases have been:
Quirindi Veterinary group purchase announced 19/8/2016 with total consideration of $11.57 million, of which 30 percent was paid in Apiam per share priced at $1.5335.
Allstock acquisition of 28/12/2016 for $1.75 million, with 30 percent paid in Apiam shares priced at $1.1957 per share.
TMVC acquisition of 16/10/2017 for $1.6 million, with 30 percent paid in Apiam shares priced at $0.8219 per share.
GDUS acquisition of 22/2/2018 for $4.9 million, with 30 percent paid in Apiam shares priced at $0.73 per share.
Passionate Veterinary Care acquisition for $0.75 million, with 30 percent paid in Apiam shares priced at $0.8180 per share.
Ace Laboratory acquisition of 3/9/2019 for $16 million, with 30 percent paid in Apiam shares priced at $0.4278 per share.
Alert readers will note that the weakening share price meant that a greater number of shares have to be allocated to cover the 30 percent of practice purchases paid by Apiam shares, resulting in shareholder dilution. Those shareholders who purchased shares at $1.00 in its December 2015 IPO have received skinny dividends and have seen the shares trade below IPO price for the past three years. The acquisition of more and more practices may not benefit existing shareholders. Synergistic benefits are hard to achieve in a business whose practices are spread over vast distances and where veterinary staffing difficulties have been acute across large animal/mixed animal rural based practices.
Where a rural veterinary practice is well run, with owner vets doing much of the work, impressive incomes have been generated. I have advised many veterinary practice owners over the years. The notion that a huge number of disparate practices can be conducted by a corporate and produce the same profit per dollar of veterinary spend represents a challenge—if not a near impossibility. Looking back at acquisitions and share market reactions, it appears that the market did not approve of the price paid for the Quirindi Veterinary Group and has been cautious about the group’s overall strategy. Having a share price substantially below the IPO subscription price of over 5 years ago is an indication that the share market does not share the enthusiasm of periodic company announcements.
Apiam faces the continuing challenge of maintaining veterinary staffing given the huge demographic challenges which have increasingly borne down on veterinary practices resulting in a difficulty in maintaining a substantial full time veterinary work force. As a veterinary workforce of predominantly fulltime vets, including practice owners, has given way to one with many part time vets over the past thirty years, this has imposed significant staffing difficulties with vet school classes changing from predominantly male to majority female and a significant reduction in the proportion of full time vets. As older, mainly male vets have sold their practices, completed contractual handover arrangements and retired, there have been visible staffing shortages, even in preferred major city practices. This situation is not going to change. Each time a fulltime vet or vets purchase a practice and leave employment, the difficulties confronting corporate practice groups increase.
The reality is that if a couple of Veterinarians buy a sound rural practice and are prepared to work hard, develop good young employee vets and make sound financial decisions they will far exceed the financial rewards which can be gained by working for a veterinary corporate. They will be better off at the conclusion of their career by several million dollars regardless of the eventual sale price of their practice. I do not own shares in Apiam Animal Health.
Archegos, Credit Suisse and Nomura Losses.
The US$4.7 billion loss by Credit Suisse related to Archegos, a private hedge fund business conducted by Bill Hwang, is one of the losses suffered by a group of international banks. Being structured as a “Private Office”, it did not have as onerous a reporting regime as publicly listed or publicly regulated operations. Credit Suisse was hit by the financial collapse of Archegos Capital, together with its too-concentrated backing of Greensill Capital’s debt factoring. The weakness unknown by Credit Suisse was that the bank did not know of the investments in the same companies funded via margin lending by at least six major banks referred to in the trade as “prime brokers”. Collectively, these banks provided Archegos—which had some US$10 billion of assets—with more than US$50 billion to invest using a derivative known as total return swaps. That strategy works spectacularly well in a rising market but is disastrous when the share price falls, and the banks which are holding the shares in their name make margin calls which, if not paid promptly, causes them to exercise their right to start selling securities.
A fuse was lit when ViacomCBS, whose share price had risen substantially, decided to take advantage of its buoyant share price to undertake a substantial capital raising and its shareholders reacted negatively, pushing its share price down by 25 percent and thus creating margin calls. Archegos started selling ViacomCBS and other stocks in its concentrated portfolio, in turn widening the margin calls by its other bankers/prime brokers. Panic ensued as Archegos Capital Management net assets were wiped out and bankers announced massive losses. The first bankers to react—Morgan Stanley and Goldman Sachs—sold down rapidly, limiting their losses relative to those who were a little slower off the mark. Reportedly the major losers were Credit Suisse and Nomura which is reported as losing US$2 billion. None of the banks had been aware of the parallel funding of positions in the same stocks by a reported total of six major international banks. None of the banks were Australian.
Similarity to Adelaide Steamships (Adsteam) collapse.
Long before the term “hedge fund” had entered the common financial dictionary, a very confident Latvian immigrant Johannes (John) Spalvins worked his way to the top of what had been a fairly sleepy Adelaide Steamship (Adsteam) company which had gotten its name from the operation of tug boats and coastal steamers. First under Ken Russell, then under Spalvins, Adsteam had gone on a spectacular buying spree across corporate Australia, buying stakes in a vast array of businesses, including control of Woolworths and David Jones. The resulting portfolio included a host of businesses with a vast array of interlocking shareholding and a structure which baffled most analysts. Much of Adsteam’s debt was buried inside companies which it controlled, but in which it did not appear to have a controlling interest. Adsteam also owned major stakes in the ANZ, Westpac and National Banks, plus BHP. It dazzled most financial writers and most financial analysts, and for several years each of the major bank lenders were unaware of Adsteam’s total debt exposure, each believing that it was the group’s major lender. Adsteam survived the October 1987 global stock market collapse, but with rising debt buried across its array of interlocking companies it then ran into the steeply increasing interest rates of the early 1990s; the increasing interest rates were largely met with increasing debt as Australia moved toward recession. This pushed the group into a dangerous situation exacerbated by some serious acquisition mistakes as Spalvins’s judgement deserted him.
In May 1990 a nervous Westpac demanded that, as a condition of renewing its loans to the group, it must be allowed to inspect Adsteam’s books using one of the bank’s top analysts. With Westpac unable to gain a sufficiently clear picture of Adsteam’s tangle of interlocking company shareholdings and debts, it convened a meeting of senior executives of Australia’s four major banks. At what was said to be a dramatic meeting the four banks discovered that Adsteam Group total debt was $6.4 billion, of which the four banks were owed $4 billion and that Adsteam combined shareholder’s funds were around $1 billion. These were huge debts in 1990 and the gearing ratio was far from safe. From there the banks effectively took control of Adsteam’s affairs, forcing asset sales and penalty interest rates. The Adsteam group dissolved, destroying the value of investors in a number of companies, some of which were subsequently refloated, Woolworths being the most notable.
The Common Element
The common element in both Archegos and Adsteam is that none of the large financiers knew of the extent of exposure to other banks, and in both cases individual banks had no idea of the level of risk underlying their positions.
The Weakness of Dental and Veterinary Corporates
No matter how many dental or veterinary practices groups such as Maven, National Dental Care, 1300 Smiles, Ekera, Apiam Animal Health or National Veterinary Care own, they cannot replace staff cost with machines. No amount of capital spend will enable a dentist to drill two patients’ teeth simultaneously, nor enable a veterinary surgeon to treat two animals at once! Regardless of what they may say, veterinary corporates have visible staffing and service issues.
Dental corporates are overly reliant on preferred provider relationships with private health insurers who sell ancillary health insurance, which does not provide good value for the majority of the insured. Dentists who own practices need to find tasteful ways of informing their patients that they are better off ditching extras cover and paying directly for dental treatment. Much health fund advertising skirts around this truth. A combination of overreliance on health fund ancillary insurance and squeezing clinical staff remuneration can lead to hasty treatment, and to treat item numbers too fast to meet actual clinical needs. An example can be a hygienist rushing soft tissue treatment, which needs to be done thoroughly and regularly but which is constrained by a health funds treatment and payment restrictions.
Which dentists and veterinarians wants to be successful?
Over a period of 33 years spent advising practice owners I observed that the best run privately-owned dental and veterinary practices provide long term financial rewards for owners prepared to work hard that far exceed the renumeration that can be gained over a career from working for a corporate. Those who employ other clinical staff and who include their spouse in ownership and tax planning including superannuation, who jointly own their premises, jointly fund superannuation and increase practice turnover, profit and goodwill value often retire several million dollars better off than those who spend their career in corporate employment.
Western Areas Limited (WSA)
WSA’s principal activity is the mining, processing and sale of nickel sulphide concentrate, the continued assessment of its nickel sulphide mines, and the exploration for nickel sulphide and other base metals.
WSA recently completed a $85 million share placement at $2.15 to institutional investors and is in the process of a $15 million share purchase plan to ordinary shareholders.
The capital raised is to be applied to the development of its Odysseus WA mine and the advancement of projects at Forrestania and Cosmos plus additional exploratory drilling.
WSA operates four nickel mines in a remote part of West Australia—Flying Fox, Spotted Quoll, Cosmos and Odysseus. Some details of each are available online.
Reportedly the demand for nickel is likely to quadruple in coming years, driven by the need for more efficient battery technology.
This is general advice and readers must do their own research starting with WSA’s announcements, half yearly and yearly results and its recent prospectus. Do further research on nickel demand and consider other professional advice sources. I regard my super fund modest holding as being speculative at this stage.
Reader comments please
Readers who wish to comment on any of the content of my newsletters are asked to do so. Comments on the comparative modus operandi of corporate versus privately owned practices are particularly welcome.
About Graham Middleton
I spent over 56 years in the workforce, of which the last 33 years was spent advising clients—mainly practice owning health professionals—on practice business and financial matters including advice on SMSFs and personal finances. For the last 26 years, I advised clients as a founding partner of Synstrat Group. I sold out of Synstrat on 30 June 2020 and retain many friendships among former clients including many dental, medical and veterinary practitioners. In my former life I spent two years working for Shell, became a regular army officer, then spent two years as HR Director of the Victorian Attorney General’s Department. I have written a regular article in Australasian Dental Practice magazine for the past 29 years and have had a number of books on financial/business matters published.
Book
My book on the secrets of financial success of Australian dentists is currently with the editor. Copies will be made available to donors to the Delany Foundation. Further details to be advised when printed copies are available, hopefully mid-year. All costs of production will be met by me personally, and all donations will be 100 percent applied by the Delany Foundation toward its charitable mission which includes assisting schools in Ghana, Kenya and Papua New Guinea.
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Best wishes
Graham Middleton
