BUSINESS - Pet Value and Pet Supermarket Merge

Pet Valu and Pet Supermarket announced that they have merged to create the third largest pet specialty retailer and the largest small format, neighborhood, pet specialty retailer in North America.

The combined business is named Pet Retail Brands.  With over 930 stores, it will generate approximately $1 billion in system-wide retail sales across the US and Canada.

Pet Retail Brands will have an extensive retail footprint with stores from the East Coast to the West Coast and from Miami to Vancouver and is well positioned for continued growth. Terms of the agreement were not disclosed.

Pet Valu was taken private by an affiliate of Roark Capital in August 2009. Pet Supermarket was acquired by an affiliate of Roark Capital in April of 2015.

Pet Retail Brands will remain headquartered in Markham, Ontario and Pet Supermarket operations will continue to be based in Sunrise, Florida.

Ezra Field, Managing Director of Roark Capital, said, “The combination of these two highly complementary businesses, both long established brands with strong cultures and deep commitments to local communities and helping pets, will create the leading community focused pet specialty retailer in North America.”

As part of the transaction, Thomas McNeely will become President and Chief Executive Officer of Pet Retail Brands. Mr. McNeely has been Chief Executive Officer of Pet Valu since August 2009.

“Bringing together two of the fastest growing pet specialty retailers creates a powerful platform to share resources and best practices to support both Pet Supermarket, Pet Valu and their loyal customers. I look forward to working with all of the employees and suppliers of Pet Supermarket as well as Pet Valu franchisees to grow these brands, which have been providing pets with superior products and service for over 40 years,” Mr. McNeely said.

Concurrent with the closing of the transaction, Diane Holtz announced her retirement from her role as Pet Supermarket’s President and Chief Executive Officer.

Ms. Holtz joined Pet Supermarket in 1992 and has served as President and COO since 2002. She was President and CEO and a member of the Board since 2015.

“My 23-year journey with Pet Supermarket is filled with wonderful memories of our passionate team that ranks among the best and brightest in pet retail,” said Diane Holtz. “I retire knowing this transaction positions Pet Supermarket for continued success on behalf of all its employees and partners. I am grateful for the support and guidance of the Roark Capital team and look forward to seeing Pet Supermarket continue to grow and delight pets and pet parents alike.”

PetLynx Moves to Sell HomeSafe™

World’s best/only automated RTO service HomeSafe™ is ready for Prime Time

PetLynx Corporation says it is putting HomeSafe™ Canada’s largest and fastest growing Return to Owner (RTO) service up for merger or sale.

Since 2009, PetLynx has invested 9 million $CAN to build and commercialize the world’s Best/Only automated RTO service for urban municipalities. The system now supports 1.02 million Active Residual Subscribers (ARS) and returns pets home in more than 340 Canadian municipalities. As PetLynx begins to look south, management acknowledges success in the US market will require sufficient resources and/or a partner that adds operational strength to PetLynx.

Over the past eight years, PetLynx has developed a global Digital Channel and Gathered Subscribers with the lowest cost of acquisition in the industry. HomeSafe™ delivers irrefutable evidence for creating a trusted ‘ecosystem’ by Growing Digital Services. HomeSafe™ is clearly the lowest cost service provider in North America. As the lowest cost service provider, HomeSafe™ has a competitive advantage during emergence and the ability to drive substantial profits as the play matures.

“Management has met with professionals that are expert in mergers, acquisitions and auctions,” said Thomas R. Trifaux, PetLynx Board Chair. “I am confident we will soon contract with an organization that can extract value for an emerging play like HomeSafe™. Our intent is to deliver good value to our shareholders while we resource and enhance service offerings for our HomeSafe™ subscribers.”

According to recent research, valuing subscriber plays is more of an art than a science. As a subscriber play, the HomeSafe™ RTO service would likely be valued by multiplying the number of Active Residual Subscribers by the loyalty/experience factor and the number of dollars of free cash flow over the forecast period. HomeSafe™ has delivered an industry leading loyalty/experience factor of 6.2 years which should drive an industry leading valuation.

However, several other factors are likely to influence the HomeSafe™ valuation. New privacy and Ecommerce legislation, the decline of ‘blast and cast’ marketing strategies and a new understanding of subscriber preferences has moved brands to acquire entire ‘ecosystems’ at a premium over other calculations. In fact, for brands that wish to access a developed ecosystem or brands that need a compliant opt-in channel for their services, the value of HomeSafe™ may be well beyond a subscriber based calculation.

According to PetLynx Managing Director, Larry R. Evans, “The patient approach of PetLynx shareholders to create technology and to develop a proven ecosystem is something of real value in the digital economy. I believe, from every perspective, HomeSafe™ is ready for prime time.”

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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Is a Large American Pet Store Merger about to Happen?

A potential merger is on the table that will create a single company that holds 30% of the pet specialty stores in the United States. Petco Holdings Inc will potentially be acquired by PetSmart Inc. Over the past year, Petco had approximately $4 billion USD in sales and PetSmart had $7.1 billion USD in sales. IBISWorld estimates that PetSmart and Petco bring in more than half of America’s pet store revenue.

In 2014, PetSmart was working with Petco on a merger however PetSmart withdrew from the deal and was bought by BC Partners Ltd for $8.7 billion USD. At that time, revealing confidential information to a large competitor may not have received antitrust clearance.

Currently Petco is owned by TPG Capital LP and Leonard Green & Partners LP. Last month Petco was registered for an initial public offering that valued the company at approximately $5.5 billion USD including debt. While the company registered for an IPO, it is also potentially for sale and Petco officials have been involved in discussions with private equity firms.

Informal talks have taken place between PetSmart and Petco with the goal of increasing the price of Petco. PetSmart has yet to be given access to Petco’s confidential information. Currently, none of the parties involved are willing to publicly discuss any information pertaining to potential negotiations.

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