PetSmart Math Supports Activist Sale Thesis

NEW YORK (The Deal) -- Though activist investor Jana Partners said in a regulatory filing this week it believes the best option is for pet retailer PetSmart (PETM) to sell itself -- preferably to a financial sponsor -- industry experts are trying to figure out how that math would work.

One of the reasons for that is the perceived success rate of the activist. When Jana revealed it had a 9.9% activist stake at the start of the month, the stock predictably spiked. That, and other financial metrics, led news outlets to suggest a deal might be a stretch for PE.

A review of the numbers suggests otherwise.

Ebitda at the company is projected to grow, though, at a slower pace, according to analysts' estimates compiled by Bloomberg. For the fiscal year ended Feb. 3, PetSmart had almost $930 million in Ebitda as compared to $890 million for the prior year. And Ebitda is expected to grow to about $940 million for the curent fiscal year ending Jan. 31, 2015 while the fiscal year after that Ebitda is projected to grow to roughly $960 million.

On July 2, the day before Jana revealed its stake, PetSmart's unaffected stock price closed at nearly $60 a share, giving the company a market cap of about $5.95 billion. Adding debt of nearly $520 million and subtracting cash of about $230 million to that amount (per Bloomberg data), would equate to an enterprise value of $6.24 billion or a valuation multiple of 6.7 times Ebitda (using the $930 million Ebitda figure for its current fiscal year).

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