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PetSmart Shops Assets Amid Activist Pressure

Having officially put itself on the block, potential acquirers will be crunching the math for the deal. And it's a deal that makes sense, the math for the deal, especially one that involves private equity.

With about $250 million in cash on its balance sheet, and almost $520 million in debt, PetSmart has an enterprise value of approximately $7.18 billion, based on a market cap of about $6.91 billion. That valuation is a multiple of 7.63 times the roughly $940 million in Ebitda PetSmart is estimated to generate in the fiscal year ending Jan. 31, according to Bloomberg data.

But that enterprise value is based on the affected stock price. On July 2, the day before Jana Partners announced its stake, PetSmart closed at $59.81 per share, 14% below where it closed on Tuesday at $69.70 per share.

At nearly $60 a share, PetSmart had a market cap of about $5.95 billion. Adding debt of nearly $520 million and subtracting cash of about $250 million to that amount (per Bloomberg data), would equate to an enterprise value of $6.22 billion or a valuation multiple of 6.6 times the $940 million in Ebitda projected for its current fiscal year.

That's under the unaffected 7 times multiple PE firms look for when considering potential buyout targets. A 20% premium to the unaffected price would equate to an offer somewhere in the vicinity of $72 per share.

Plus, PE firms merging PetSmart with a portfolio company could generate cost-saving synergies and provide room for an even higher bid. Historically, PE firms can end up paying multiples in the high single digits for more mature retailers. At $72 per share, the company would have a market cap of $7.14 billion based on roughly 99.2 million outstanding and an enterprise value of $7.41 billion.

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