BC Partners, along with several limited partners including StepStone and Canadian pension manager La Caisse, said in a release on Sunday that it would acquire the chain of stores for $83 a share, a 39% premium to PetSmart's stock price on July 2, 2014. Activist investor Jana Partners disclosed a 9.8% stake on July 3 and urged the company to seek a sale.
The deal is expected to close in the first half of 2015.
PetSmart shares were up 4.2% to $80.92 at last check. Here's what analysts said.
David Schick, Stifel (Hold)
PETM clearly held a deliberate and thorough bidding process given the announced strategic review and breadth of media reports on a potential sale. Longview has 9% of shares and is committed to the current transaction. The consortium is financed and there's little risk to the 1H15 close in our view. We do not expect, given the thoroughness, that it is likely for another bidder to emerge. We don't expect PETM to remain on the previously disclosed cost cut plan, but a private PETM and PETC is good for others in the industry. We'd expect both to maintain a rational pricing environment. We would not be surprised by a merger with PETC at some point as PETM indicates smaller specialty players are taking share (we think Pet Supplies Plus and Pet Valu, among others). Bigger picture, this acquisition is a noteworthy change for the retail sector after a somewhat low success rate in recent years (e.g. BBY, BKS, and AAP).
In a long-awaited climax to the Board's strategic review, we are impressed with the ultimate value being created by this deal for shareholders, the rich value suggests that the buyers are comfortable paying for the $200m in cost cuts recently announced by the company. These profit-boosting cuts may have also helped banks and regulators get comfortable with the elevated leverage in the deal. It appeared to be a heated auction for PETM, with BC Partners outbidding frontrunner Apollo at the last minute based on press reports; we will await terms of the buyout agreement, but believe there will unlikely be counterbids from this point forward. Given "fully committed" debt financing, we believe the deal will likely close as planned in 1H15 as long as regulators do not balk at the leverage in the deal. Accordingly, we are raising our target price from $80 to $83.
Seth Sigman, Credit Suisse (Neutral)
The private equity buyout of PETM, a name that had been viewed as future road kill for e-commerce, seems to be a very positive signal for brick & mortar retail, particularly when combined with other recent activist investor involvement in this group. Specifically, for other segment leaders at similar points in their lifecycle that have also fallen out of favor, such as DKS, BBBY, PIR, and even BBY, the strong support for PETM from long-term investors may provide another reason for the market to reconsider the outlook and the options to realize the potential value in these higher quality retail concepts. We add CAB and TCS, who are both earlier in their lifecycle, but are at pivotal points in their investment stories as the market debates their fate.
While these are not all LBO candidates, the PETM situation should remind the market that there is underlying value in high quality, service-oriented retail franchises, with clean balance sheets and superior vendor relationships in healthy demand categories. With a little nudge and some catalyst for change (e.g., leverage, strategy, growth plans, among other options), these overlooked names could generate significant returns for investors. It is that potential for change that makes these interesting alternatives, or at least underscores the risk of being short, at a time when many our above the fray names (WSM, ULTA, TSCO, HD, LOW, etc.) are trading at higher valuations.
Mike Baker, Deutsche Bank (Hold, $83 PT)
PETM is being acquired by a group led by BC Partners in a leveraged buyout for $83 per share. This equates to about $8.7b in total enterprise value and about 9.1x trailing EBITDA. This is above our LBO model which pointed to value in the high $70 range, but seems reasonable. We can get value into the low $90s if a deal were to involve a strategic buyer. But, short of that, we believe this deal makes sense and with financing seemingly in place, we believe the deal should get done as we don't see much more upside from a financial buyer. We are raising our price target to $83 in line with the buyout price and maintaining our Hold rating. The main risks at this point are related to the deal, with it not going through the downside risk and a higher competing bid the upside risk.
"We rate PETSMART INC (PETM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, reasonable valuation levels, good cash flow from operations, growth in earnings per share and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had subpar growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Despite its growing revenue, the company underperformed as compared with the industry average of 9.7%. Since the same quarter one year prior, revenues slightly increased by 2.6%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- Net operating cash flow has increased to $125.35 million or 16.88% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -22.10%.
- PETSMART INC's earnings per share improvement from the most recent quarter was slightly positive. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, PETSMART INC increased its bottom line by earning $4.03 versus $3.55 in the prior year. This year, the market expects an improvement in earnings ($4.42 versus $4.03).
- The current debt-to-equity ratio, 0.42, is low and is below the industry average, implying that there has been successful management of debt levels. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.40 is very weak and demonstrates a lack of ability to pay short-term obligations.
- You can view the full analysis from the report here: PETM Ratings Report