BC Partners to buy PetSmart

February 2015 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

In December, a group of investors led by private equity (PE) firm BC Partners agreed to acquire pet supply retailer PetSmart in a deal worth $8.7bn. The deal was struck following a competitive auction process which saw a number of PE groups expressing an interest in the PetSmart business. The acquisition was the biggest PE deal of 2014, easily topping the next largest transaction: Blackstone’s’ purchase of Gates Global LLC for $5.4bn in July.

According to a statement released by PetSmart, the investor group will pay $83 per share to take control of the company. The agreed price represents a premium of 6.8 percent on PetSmart’s closing price on Friday 12 December, the day before the deal was announced. PetSmart and BC Partners expect the deal to close in the first half of 2015, on condition that the transaction wins the approval of both regulators and PetSmart’s shareholders.

Phoenix-based PetSmart, which employs around 54,000 employees and operates 1387 retail locations, announced in August 2014 that it was exploring a possible sale. The firm’s decision to sell was precipitated by the revelation that activist investor Jana Partners had become a major shareholder in the company with a 9.75 percent stake. Shares in PetSmart, which had suffered a shock 18 percent decline earlier in the year, subsequently recovered well following the agitation of both Jana and Longview Asset Management, PetSmart’s second largest external shareholder. The two firms applied considerable pressure to PetSmart to sell itself. Accordingly, the proposed sale to BC Partners is a significant victory for the activists.

Regardless of the sale announcement in August, the retailer had been on the radar of a number of PE firms for some time. Though BC Partners won the day, some of the world’s biggest PE groups, including Apollo Global Management, Kohlberg Kravis Roberts and Clayton Dubilier & Rice, expressed an interest in acquiring PetSmart.

The PE industry has long viewed PetSmart positively due to its strong cash flow and minimal level of debt. However the firm has faced mounting pressure in recent years, as customers have turned increasingly to the internet to do their shopping. Big name retail groups including Amazon and Walmart have recently become major forces in the online pet retail space, an area in which PetSmart has very little presence. As a result of the changing habits of consumers, PetSmart’s net income remained relatively flat in 2014. Though the company expects to see similar sales figures in 2015, PetSmart plans to introduce cost saving measures which will generate synergies of around $200m. These cost cutting measures are part of a larger strategic overhaul which will set the company in good stead moving forward.

“This transaction is a testament to the strength of the PetSmart brand and franchise and reflects the dedication and commitment of our 54,000 associates to serving our customers and delivering value for our company and our shareholders,” said David Lenhardt, PetSmart’s president and chief executive. “The consortium led by BC Partners will be an excellent partner for PetSmart as we continue to implement our strategic plan to capitalise on our opportunities for growth and meet the needs of pet parents.”

The announced deal, including debt, will see BC Partner’s investor group pay around 9.3 times PetSmart’s earnings before interest, taxes, depreciation and amortisation for the 12 months up to 2 November. In order to finance the deal, BC Partners, which is based in London, will rely on a debt package sourced from a number of banks including Citigroup, Nomura, Jefferies, Barclays and Deutsche Bank. “We are very pleased to add PetSmart to our portfolio of investments. PetSmart is an iconic brand and the category leader in the growing pet retail industry. We look forward to working with management to continue growing PetSmart’s business and executing against its recently announced strategic initiatives,” said Raymond Svider, a managing partner at BC Partners.

Some commentators have suggested that the deal for PetSmart will open the floodgates for PE deals to occur more frequently in 2015. With PE firms sitting on huge, hitherto unused committed funds for buyouts, that capital will need to be deployed sooner rather than later.

Richard Summerfield