Petsmart, the US pet supplies retailer, has agreed to sell itself to a consortium led by BC Partners, the European private equity firm, in an $8.7bn deal that is the largest leveraged buyout of the year.
BC, working with Caisse de Depot et Placement du Quebec, the Canadian pension fund, will pay $83-a-share for Petsmart, representing 9.1 times earnings before interest, tax, depreciation and amortisation for the 12 months to November.
The agreement to sell to BC brings to an end what has been a drawn out sale process for the management of Petsmart. The company has been under pressure from activist hedge fund Jana and longstanding investor Longview Asset Management since July, with both calling on the board to pursue a sale.
The Petsmart auction, managed by JPMorgan and law firm Wachtell, Lipton, Rosen & Katz, drew widespread interest from private equity suitors. Rumours had circulated over the weekend that Apollo, the buyout group led by billionaire investor Leon Black, had triumphed in the race to acquire the company.
Want to publish your own articles on DistilINFO Publications?
Send us an email, we will get in touch with you.
The price agreed, which includes debt, marks a close to 40 per cent premium over Petsmart’s market value on July 2 — the day when rumours of activist pressure first materialised. Longview will invest a third of its 9 per cent Petsmart stake in the new business.
“Petsmart is an iconic brand and the category leader in the growing pet retail industry. We look forward to working with management to continue growing Petsmart’s business and executing against its recently announced strategic initiatives,” said Raymond Svider, a managing partner at BC Partners.
James A. Star, chief executive of Longview, said: “This is an excellent outcome for Petsmart shareholders; it delivers significant and immediate value while best positioning the company for the future.
“We fully support the transaction.”
Problems for Petsmart began to emerge in May, when the company missed earnings expectations in the first quarter and lowered its guidance for the rest of 2014. The group has suffered from intense competition from online retailers and from rival Petco’s smaller store format.
At the time, David Lenhardt, chief executive, concentrated on potential business improvements, saying it would launch new advertising campaigns, improve its pet food offerings, and beef up its website.
The buyout is the largest take-private transaction of 2014, eclipsing Onex’s €3.75bn for SIG Combibloc, the drink carton maker, last month and Apollo’s $1bn takeover of Chuck E Cheese.
Private equity funds have been frustrated in the wave of mergers, as strategic corporate buyers have consistently outbid them on any assets that do come to market.
In the peak year of 2006, there were $311bn take-private deals. By contrast this year the value of such deals was expected to total less than $20bn, according to TPG. “Sponsor volume has been relatively flat since 2009,” the group wrote in material distributed to its investors.
At the same time big buyout firms have been far more active in selling companies to take advantage of the buoyant stock market in the US. As a result, the private equity firms collectively returned a record $516bn to their investors on an annualised basis this year, but only asked them for $306bn for new deals, according to Hamilton Lane research.
BC Partners and its consortium investors were advised by Simpson Thacher & Bartlett LLP and Ernst & Young. Longview was represented by Skadden, Arps, Slate, Meagher & Flom. Citigroup, Nomura, Jefferies, Barclays and Deutsche Bank, have underwritten the debt package to finance the acquisition.
While debt is cheap, US regulators have discouraged the kind of heavy debt loads that the buyout firms put on their acquisitions in the boom years. That is among the reasons the financiers of the Petsmart deal also included overseas banks and entities not subject to pressure from US regulators.
The deal marks the second largest leveraged buyout of a US company by a foreign buyer, according to data from S&P Capital IQ.
Date: December 14, 2014