The pet supply retailer, PetSmart (PETM, Financial) announced on December 15 that it has agreed on the bid from BC Partners looking ahead to acquire the former. J.P.Morgan (JPM, Financial) would be serving as the financial advisor of PetSmart while Wachtell, Lipton, Rosen & Katz would serve as their legal advisor. It is worth noting that this announcement follows a review of strategic alternatives by the PetSmart board of directors to maximise shareholder value, which begun over this summer. Now let’s take a quick look into the details of the transaction which was shared publicly by the company before the acquisition gets completed by the first half of 2015.
Taking PetSmart out on a walk
Alas, the pet supply retailer did succumb to calls from shareholders for a sale on this Sunday, and signed an agreement to be bought by a private equity consortium led by BC Partners for $8.7 billion, in the largest leveraged buyout of the year.
While most of the P/E firms are reluctant to take on companies private for fear of overpaying, this struck deal illustrates how activist investors have the potential to drive corporate boards to explore such deals and accept a price that makes the leveraged buyout possible.
PetSmart announced that BC Partners as well as some of its fund investors had agreed to buy the company for $83 a share. Longview Asset Management which has a 9% stake in PetSmart will roll a third of its holdings into the deal.
This decision of the buyout came in as the retailer was facing intense competition from Wal-Mart (WMT, Financial) and Amazon (AMZN, Financial), squeezing the sales in the specialty stores. Also investors were pressing on the buyout after the retailer reported flat third quarter income last month of $92.2 million as net sales rose by a petty 2.6% to $1.7 billion.
Looking ahead as partners
According to the American Pet Products Association, the U.S. pet industry is expected to hit a record $59 billion this year. Since PetSmart has over 1,400 stores in North America and offers a range of services ranging from pet boarding, medical services, grooming, training and adoption, it is an iconic brand and is referred as the category leader in the growing pet retail industry.
While speaking on the buyout, Raymond Svide of BC Partners responded – “We are very pleased to add PetSmart to our portfolio of investments…” In fact Dealogic states that this buyout earmarks the biggest P/E deal struck globally this year and it even beats the Blackstone’s (BX, Financial) $5.4 billion acquisition of auto-parts maker, Gates Global that got completed in the year.
As the pet supply retailer continues to face challenges, especially as shoppers are moving online, it does not expect much of a sales boost next year, but the management has confirmed to have a plan in place to cut costs by $200 million by end of the coming year.
The company believes that this cost-cutting initiative along with a larger strategic overhaul is necessary to set the company up for future growth.
To conclude
As PetSmart is facing a tough road amid intense rivalry from rivals, the management has been forced to accept the buyout offer to survive in business. Let’s stay tuned and keep an eye on how the buyout ultimately takes its final shape in the year ahead.
