PetSmart to be Acquired by BC Partners for $8.7 Billion

In a sign that club deals are not yet over, and private equity's appetite for large retailers in select situations still exists, PetSmart Inc. (PETM) has agreed to be acquired by a consortium led by BC Partners Inc. for $83 per share in cash, valuing the retailer at about $8.7 billion, it said on Sunday.

A source familiar with the situation said that while the largest leveraged buyout this year appears to be a satisfactory transaction, the possibility remains that Petco Animal Supplies Inc. and its PE backers Leonard Green & Partners LP and TPG could make a rival offer based on BC Partners' due diligence and winning bid.

Leonard Green and TPG were not allowed to participate in the auction process because of competition concerns. A number of PE firms were said to be circling the retailer at various points, including KKR & Co. LP and Clayton, Dubilier & Rice LLC as well as Apollo Global Management LLC, sources had said.

Meanwhile, the $83 per share deal would give the Phoenix-based pet retail giant a market cap of about $8.25 billion, with approximately 99.4 million shares outstanding according to filings with the Securities and Exchange Commission.

And with cash and cash equivalents of roughly $170 million, no long-term debt and long-term capital lease obligations of about $520 million, the enterprise value equates to approximately $8.6 billion.

That works out to be a multiple of about 9.2 times the almost $930 million in Ebitda PetSmart generated for the fiscal year ended Feb. 2, a multiple of roughly 9.1 times the close to $940 million the retailer generated for the last 12 months ended Nov. 2, the company said, and nearly 9 times the approximately $960 million in Ebitda the company is projected to generate for the fiscal year ending on Jan. 31, according to data provided by Bloomberg.

Participating in the transaction are funds advices by BC Partners and several of its limited partners, including La Caisse de dépôt et placement du Québec and StepStone, as well as PetSmart shareholder Longview Asset Management, which holds about a 9% stake in PetSmart.

Longview will contribute about a 3% stake to the deal, while selling a 6% stake. It owns close to 9 million shares, which means it would contribute 3 million shares worth nearly $250 million and will sell 6 million shares worth close to $500 million.

The deal was unanimously approved by PetSmart's board and is expected to close in the first half of 2015. Longview Asset Management, which supported activist investor Jana Partner LLC's push for a leveraged buyout of the company, will vote its shares in approval of the deal.

Jana revealed its roughly 9.8% stake in PetSmart in early July and was persistent in its calls for PetSmart to explore a sale, even threatening a proxy contest, until the pet products purveyor finally caved in late August to do exactly that, hiring JPMorgan Securities LLC as its financial adviser and Wachtell, Lipton, Rosen & Katz as its legal adviser.

To keep the pressure up, Jana had even proposed a potential board slate for PetSmart in late November, as backup insurance if PetSmart did not complete its strategic review to the satisfaction of the activist.

Citigroup, Nomura, Jefferies, Barclays and Deutsche Bank have underwritten the debt package to finance the acquisition according to the company's announcement.

One of the issues involved these days in leveraged buyouts was whether financing could still be easily arranged. Federal regulators have indicated to banks that LBOs could not exceed 6 times Ebitda going forward.

But a source said that in order to get the needed financing, the amount of Ebitda calculated to be generated could be increased by citing cost savings, therefore qualifying for more debt. Also, if a company plans to repay senior debt within seven years, which would be a quick repayment plan, it could potentially obtain more financing, this person said. In fact lenders may be willing to finance PetSmart, requiring the PE-led consortium to put in only 25% or less.

So far, details on the debt financing, however, were not provided, by the parties.

PetSmart received financial advice from its in-house counsel Paulette Dodson and J.P. Morgan's Anu Aiyengar and Erik Oken and legal advice from a Wachtell team that included David C. Karp, Mark Gordon, Joshua A. Feltman, Adam J. Shapiro, T. Eiko Stange, Viktor Sapezhnikov, Ian Nussbaum, Alexander Whatley, Corinne Musa, Rohit Nafday and Tijana Dvornic.

BC Partners received legal advice from a Simpson Thacher & Bartlett LLP team that included Ryerson Symons, Jennifer Hobbs, Ryan Bekkerus, Gregory Grogan, Gary Mandel and Peter Kazanoff. It also received advice from Ernst & Young.

Longview received legal advice from a Skadden, Arps, Slate, Meagher & Flom LLP team that included Rodd Schreiber, Ann Beth Stebbins, Gavin White and Steven Messina.

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