Patterson's purchase completes decadelong transformation

It's taken a decade, but Patterson Cos. is well on its way to transforming the company into what leaders envisioned a decade ago when critics were at their loudest.

Through controversial acquisitions — ones that doggedly added veterinary, farm and human therapy supplies to a mainstay of dental products — the Mendota Heights-based distributor transformed itself into a $5.5 billion global behemoth.

Last week, Patterson completed its $1.1 billion purchase of Animal Health International, a large distribution firm with operations in Canada, the United Kingdom and the United States.

The massive deal makes Patterson a player in the farm equipment segment for the first time. It doubled Patterson's animal supply business and has finally quieted naysayers who said the 138-year-old distributor with its roots in drugstores and dental supplies should not dabble in the pet, vet and farm products arena.

The transformation began in 2005, when Patterson officials made the controversial decision to grow tiny pet, equestrian and physical therapy businesses through acquisitions.

Ticked investors cried foul and complained about dwindling profits and missed forecasts. They ultimately hacked the stock price down 34 percentage points in a single week and filed 12 lawsuits alleging that Patterson falsely inflated expectations while charging into lower margin terrain.

Undeterred, executives plowed ahead, insisting that diversifying the product line made sense. Patterson was already one of the largest suppliers of dental equipment, chairs, lights and cabinets in North America. Sales growth had to come from someplace else.

"We are confident that the transformation we are pursuing for Patterson will lead to long-term growth and success," CEO Scott Anderson told analysts last month during a conference call. "Executing our strategic plan and focusing on operational discipline enabled Patterson to close fiscal 2015 with healthy contributions from all three of our businesses."

Annual revenue grew 8 percent to $4.4 billion while profits jumped 11 percent to $223 million. The stock now trades at $48.91, which is close to a level not seen since 2005. Employment now exceeds 7,000, with most working in North American distribution centers.

Of 11 analysts following the company today, three rate the stock a "buy." Eight recommend a "hold."

Gabelli & Co. stock analyst Kevin Kedra recently changed his rating from hold to buy. "It may have been a turnaround story a few years ago. But now," he said, "they are putting themselves in a position to be successful. Now they need to execute to make sure that success will happen."

Patterson lunged at the rare opportunity to buy a large-animal supply company, "which is a big growth market," Kedra said. Animal Health "was an opportunity to expand themselves. While dental is more profitable, there are just not that many of those dental assets available."

On Wednesday, Anderson, who has been CEO since 2010, praised the closing of the Animal Health deal and the direction of the company.

"This is a transformational move for us. Acquiring Animal Health International firmly establishes Patterson in the production animal health market, in addition to building on our already strong presence in the companion pet market," Anderson said. "We are committed to growth in this industry."

He added that the deal "is a key part of our previously disclosed strategic intent to take a broadened view of our markets and position our businesses to generate profitable growth and increase shareholder value."

Animal Health adds $1.5 billion in sales to Patterson's $1.46 billion veterinary business. When combined, the unit will be led by division president John Adent and George Henriques, the unit's chief commercial officer.

Company officials concede that profit margins on animal supplies are about 4 or 5 percent, much smaller than dental.

Anderson said he expects to save about $30 million in synergy costs after the animal product units are combined.

Patterson Chief Financial Officer Ann Gugino said the decision to switch up businesses and enter less lucrative products was deliberate. "A few years ago, we took a really hard look at our strategy and asked how can we really continue to grow?" she said.

The company already controlled one-third of North America's dental and veterinary supply markets. In fact, it and two other competitors controlled about 75 percent of those markets, Gugino said.

Separately, Patterson had high capital costs and a dwindling client base when it came to its third business of supplying products to independent rehab therapists. Last month, Patterson announced that it will sell the medical rehab equipment business. The business, with just six distribution centers and operations in the United States, England, France, Australia and New Zealand, is Patterson's smallest unit. Sales fell 3 percent to $113.7 million last year.

A sale is in the works, Gugino said.

"We think the Animal Health International has the opportunity to return more," Gugino said. "We made a very deliberate decision that we were going to say yes to things that could grow the business that might be dilutive to operating margin percent but that would still provide a return on invested capital."

Dee DePass • 612-673-7725