We have been seeing indications that the antitrust enforcement agencies have been targeting private equity deals for particular scrutiny. Earlier this week, the first shoe dropped.

Private equity firm JAB Consumer Partners SCA SICAR and its subsidiary National Veterinary Associates Inc., or NVA, reached a settlement agreement with the Federal Trade Commission to resolve the FTC's investigation into NVA's proposed acquisition of SAGE Veterinary Partners LLC.

The consent agreement requires JAB to divest veterinary clinics in California and Texas, a remedy that received unanimous approval by the five FTC commissioners. However, in a 3-2 partisan split, the settlement also imposes prior approval and prior notice requirements for JAB's future acquisitions of specialty and emergency veterinary clinics.

Perhaps even more interesting is the separate statement issued by FTC Chair Lina Khan on behalf of the majority, as is the partial dissenting statement issued by FTC Republican Commissioners Christine Wilson and Noah Phillips. These statements focused on the prior approval and notice remedies, as well as the majority's skepticism regarding private equity's general business model and the effects of roll-up of markets on competition and the economy.

"Private equity firms increasingly engage in roll-up strategies that allow them to accrue market power off the Commission's radar," said Holly Vedova, director of the FTC's Bureau of Competition, in a June 13 news release. "The prior notice and approval provisions will ensure the Commission has full visibility into future consolidation and the ability to address it."

Background and Parties

JAB is a private equity firm that owns a chain of veterinary clinics through its subsidiaries NVA and Compassion-First Pet Hospitals. SAGE owns and operates 16 veterinary clinics offering specialty and emergency care in Texas, California, Washington and Alaska. In June 2021, JAB proposed to acquire SAGE for approximately $1.1 billion.

Complaint and Consent Agreement

On June 13, the FTC filed an administrative complaint alleging that the proposed acquisition would harm competition in Texas and California for veterinary care services, including emergency veterinary services because of JAB's ownership interest in more than 80 veterinary clinics through its subsidiaries.

The complaint alleged that all of these markets are highly concentrated, and the acquisition would substantially increase concentration in each market, leaving the combined firm as the only provider in some markets, and one of only two providers in other markets.

On the same day, the parties agreed to a consent agreement imposing the following requirements on JAB in order to complete the transaction:

• JAB must sell three clinics owned by SAGE in Texas and three clinics owned by JAB in California to divestiture buyer United Veterinary Care LLC;

• JAB must seek and obtain the FTC's prior approval before acquiring a specialty or emergency veterinary clinic within 25 miles of any then-JAB-owned clinic anywhere in California or Texas.

• JAB must provide notice to the FTC in writing 30 days prior to acquiring any specialty or emergency veterinary clinic within 25 miles of a clinic owned by JAB anywhere in the United States that otherwise is not required to be reported under the Hart-Scott-Rodino Act.

• JAB must comply with the prior notice requirement on a nationwide basis and the prior approval requirement in Texas and California for 10 years.

Private Equity Deal Focus

This new focus on private equity did not come out of the blue. Khan previewed this new priority in September 2021 in a memo to her staff, noting that "the growing role of private equity and other investment vehicles invites us to examine how these business models may distort ordinary incentives in ways that strip productive capacity and may facilitate unfair methods of competition and consumer protection violations."

The dueling statements issued by Khan and the Republicans present stark contrasts to private equity and these notice remedies. They are worth setting out in some detail.

After explaining that the prior approval and prior notice provisions in the consent decree permit the FTC to better monitor markets, particularly where, as here, the acquiring party had engaged in anti-competitive acquisitions previously, Khan turned to private equity concerns more generally[1] and opined that private equity "business models may in some instances distort incentives in ways that strip productive capacity, degrade the quality of good and services, and hinder competition."

To Khan and the other Democratic commissioners, "serial acquisitions of 'buy-and-buy tactics'" that roll up sectors and thus "accrue market power and reduce incentives to compete" have the potential to increase prices and degrade quality.

Khan pointed to private equity's activities in health care including anesthesiology, emergency medicine, hospice care, air ambulances, and opioid treatment centers.

To Khan, a focus on short-term profits in the health care context can incentivize practices that may reduce quality of care, increase costs for patients and payors and generate appalling patient outcomes. The statement pointed to research suggesting that in elder care and disabilities care facilities, private equity ownership has led to increased deaths, failed inspections and overworked staff.

Republican Commissioners Wilson and Phillips bemoaned "the majority's evident distaste for private equity as a business model" and saw no evidence in the record to justify the prior notice and approval provisions. As a consequence, they see "imposing heightened legal obligations on disfavored groups — including private equity — because of who they are rather than what they have done raises rule of law concerns."

Conclusion

In our view, there are two clear takeaways here. First, the commission majority is primed to utilize its recently announced policy requiring prior notice and prior approval across a variety of deals and industries; they seem uninterested in Phillips' and Wilson's more modest approach to these remedies.

Second, going forward, we expect that the FTC will continue its new activism in investigating private equity firms' acquisitions of assets in industries in which they hold existing interests.

The consent agreement reinforces the notion that private equity firms should assess antitrust risks of such acquisitions, and be prepared to commit to divestitures or future notice or approval requirements in order to obtain antitrust clearance.

If there are problematic market shares in any part of a deal, private equity firms should consider a fix-it-first approach before submitting the deal for antitrust review to minimize the possibility of these new FTC remedies.

However, it is possible that the commission will not want to permit the parties to have such free rein as to who will be the divestiture buyers, since they monitor such divestitures closely now because of divestitures where the new owners did not successfully provide competition, and will take steps to not accept fix-it-first solutions.