By Xavier Brenner The pet supplies business normally isn't considered a bellwether for corporate America. However, the recent $8.2 billion deal by a consortium of private equity firms led by BC partners to take PetSmart (PETM) private may be a transaction with a very long tail.
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.
Sometimes 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 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.
The PetSmart LBO is a huge victory for activist investor Jana Partners.