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.

READ THE FULL ARTICLE 

 

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."

READ THE FULL ARTICLE