PetSmart's Acquisition of Petco Encounters Roadblocks

PetSmart and Petco were in discussion to merge the two companies with PetSmart acquiring Petco. Financial analysts had mixed opinions over what this acquisition would mean for the North American pet supply market. The two companies are still interested in joining however the deal has met some roadblocks; according to Reuters the companies are reportedly having disagreements over sharing the risk of having the deal approved by American antitrust authorities. All parties involved have asked for confidentiality, declined to comment, or did not respond to comment requests from Reuters.

Petco has declined a proposal that requires compensation to PetSmart should the Federal Trade Commission require many store closures. Petco has asked several private equity firms to submit their acquisition offers within several weeks. The owners hope to sell Petco for at least $5 billion USD, including debt.

   

Petco filed for an initial public offering in September 2015 and this avenue will be opened if the company is not sold.

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Insight Into the Potential PetSmart-Petco Merger

Petco Holdings Inc will potentially be acquired by PetSmart Inc. The two companies have had informal discussion regarding PetSmart’s potential acquisition of Petco. However, neither company is publicly disclosing any information regarding a potential acquisition.

While Petco operates more stores in the United States their revenue does not compare to PetSmart. Petco has 1,400 stores in the US and had a revenue of $3.99 billion USD last year while PetSmart has 1,300 stores in the US and had a revenue of $6.9 billion USD.

If PetSmart acquires Petco then the resulting company would control approximately 30% of the American specialty pet retail market. Such dominance would probably result in store closure according Howard Davidowitz, CEO of Davidowitz & Co., a retail investment bank and consulting firm. Davidowitz said, "They would never even get to this point without having met with every smart merger lawyer and looked at this 1,000 different ways. When you go forward with this, you are spending tens of millions of dollars just to explore it."

Wedbush Securities Analyst, Seth Basham believes that a merger would increase market concentration which would be a warning sign for regulators. Regulators may require store closures. Even if they do not, PetSmart may close Petco locations. Basham said that approximately 72% of Petco locations are within five miles of a PetSmart.

Regarding a merger, Davidowitz said, "If you are asking me if things are going to be better after the merger, (the answer is) absolutely not. What they should be doing is perfecting their businesses, coming up with specialty niches within pets. I can think of a hundred things they ought to be doing."

Basham believes a merger is “feasible and very attract financially”. He said, "We believe a combination with Petco would buy PetSmart synergies, but would not solve its competitive dilemma, underscored by rapidly shifting shopping behavior and increasing online competition. In fact, an acquisition of Petco could distract PetSmart from addressing this issue and add increasing pressure. After all, Petco is a smaller and somewhat weaker competitor with generally higher in-store pricing."

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Zoetis Announces 2015 Q2 Results

Zoetis Chief Financial Officer, Paul Herendeen said, “With our operational efficiency initiative, we have begun the process to re-shape our business around the key products, markets and manufacturing sites that will make us an even stronger and more profitable leader in animal health. Execution of these plans is underway. We are pleased to see continued efficiency and expense control in this quarter’s results, along with excellent sales growth, and we are updating our full year guidance for 2015 and reaffirming our long-term goals for 2016 and 2017.”

Summarized results of Zoetis' second quarter: 

• Delivers 11% Operational Revenue Growth and 20% Operational Growth in Adjusted Net Income, Excluding Foreign Exchange
• Records $263 Million in Charges Related to Comprehensive Operational Efficiency Initiative, Resulting in Net Loss of $37 Million, or Net Loss per Diluted Share of $0.07
• Second Quarter 2015 Revenue of $1.2 Billion Increased 1%
• Second Quarter 2015 Adjusted Net Income of $216 Million, or Adjusted Diluted EPS of $0.43, Increased 14% and 13%, Respectively
• Updates Full Year 2015 Revenue Guidance to $4.700 - $4.775 Billion
• Updates Full Year 2015 Adjusted Diluted EPS Guidance to $1.63 - $1.68

The full report may be found here.

Zoetis Chief Executive Officer, Juan Ramón Alaix said, “In the second quarter, we generated operational revenue growth of 11% based on the strength and diversity of our business. Our adjusted net income grew 20% operationally, and we continue delivering our long-term value proposition to shareholders -- growing adjusted net income faster than sales. The growth this quarter was driven by the positive performance of our portfolio in both companion animal and livestock products, the addition of Abbott Animal Health products, the growth of APOQUEL® and other new products, and the continued discipline on operating expenses. Our broad portfolio, proven business model and dedicated Zoetis colleagues enabled us to deliver these results as we began implementing significant changes to become more competitive and profitable. We remain committed to maintaining our commercial, R&D and manufacturing strengths, while reducing complexity in our business and achieving our efficiency goals.”

Zoetis Welcomes Questions on Second Quarter 2015 Financial Results

The animal health company Zoetis Inc. is hosting a webcast and conference call during which they will respond to questions from financial analysts. The event will be held at 0830 EDT on Tuesday August 4th, 2015. Chief Executive Officer, Juan Ramón Alaix and Executive Vice President and Chief Financial Officer Paul Herendee will be reviewing the results.

This event is open to investors and the public through Zoetis Events. For those unable to join the live event a replay will be available.

About Zoetis

Zoetis (zô-EH-tis) is the leading animal health company, dedicated to supporting its customers and their businesses. Building on more than 60 years of experience in animal health, Zoetis discovers, develops, manufactures and markets veterinary vaccines and medicines, complemented by diagnostic products and genetic tests and supported by a range of services.

In 2014, the company generated annual revenue of $4.8 billion. With approximately 10,000 employees worldwide at the beginning of 2015, Zoetis has a local presence in approximately 70 countries, including 27 manufacturing facilities in 10 countries. Its products serve veterinarians, livestock producers and people who raise and care for farm and companion animals in 120 countries.

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