Unloved stock In recent years, the share price and earnings of American's largest pet supply chain (which is held by the Covestor Focus Growth and Sustained Momentum portfolios and two others) have struggled in the face of online rivals such as Amazon.com (AMZN). So how did this unloved stock become the center of a bidding war? Here are four potential takeaway lessons.
Hidden valueSometimes investors miss the picture. Yes, PetSmart has lost business to Amazon.com and other online rivals. That said, the pet food business has doubled in overall sales to more than $20 billion in the U.S. since 2000. That's pretty robust growth. BC partners is paying a 16% premium to the average U.S. retail LBO over the last five years, according to data tracked by Bloomberg. Yet the group could make back its investment and then some if they can sharpen PetSmart's operations and profitability and then later engineer a sale, perhaps with its key rival, privately-held rival Petco. Combined, the two chains could enjoy economies of scale and thrive.
Buyout comeback? Buyout firms have had a tough time finding deals during the bull market that started back in March of 2009. When stocks go up, deals get overpriced. If the stock market tumbles in 2015, or treads water, there could be a big upswing in buyouts. In my opinion, private-equity firms, including Apollo (APOL) and KKR, have a ton of cash at their disposal to do deals.
Activist investors The PetSmart LBO is a huge victory for activist investor Jana Partners.
The pet supply company said in August that it was exploring a sale after Jana emerged as a major shareholder.The private equity group by PetSmart will pay $83 a share, according to a statement yesterday. That’s about 39 percent more than the company’s price on July 2 before Jana showed up. Not a bad payday.
Investing implications If mergers and leveraged buyouts take off in 2015 that could be potentially good news for investors with stakes in companies that are in demand. Another way to gain exposure to the deal economy is through ETFs that replicate the performance of a globally listed private equity index. ETFs such as the PowerShares Global Listed Private Equity Portfolio (PSP)and the ProShares Global Listed Private Equity ETF (PEX) invest in both private equity firms and business development companies like Ares Capital (ARCC) and Apollo Investment (AINV).
Upshot? So the PetSmart buyout isn't just a routine deal about dog foods and pet grooming products. It could be a signal of some bigger changes in the corporate world and deal-making in 2015. And that could spell opportunities for investors that adjust their portfolios to this new reality. Continued learning: Here's how to invest in venture capital, private equity and angel funds that seed startups.
Like what you read?Subscribe to our once-weekly email newsletter and get the best posts delivered to you in one convenient place, to browse at your leisure:
The post What PetSmart's buyout means for investors appeared first on Smarter Investing Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.