December 15, 2014 5:09 pm
Petsmart: hitting it out of the park
If private equity is buying, think carefully about
You know what they
say in Major League Baseball: be careful about being on the other side
of a player trade with Billy Beane, manager of the Oakland A’s. If Mr
Beane wants to deal with you, you may be about to get fleeced.
Company executives have been watching their
baseball. These days public companies rarely sell out to private
equity firms, which are perhaps the closest thing the dealmaking world
has to Mr Beane.
On Monday, there was a rare exception: pet supply
bought by investors led by BC Partners for $8.7bn, the largest US
take-private of the year. The buyout price is a juicy 39 per cent
premium to the price before the deal. Look deeper, however, and it
becomes clear why boards should tread carefully when considering
offers from private equity.
The sale process was driven by investor Jana
Partners, better known for eschewing short-termism. But it wanted
Petsmart to chase a sale because private equity was interested. Pet
supply chains have long been favoured for their steady,
recession-resistant cash flows. Petsmart’s closest rival Petco was
acquired in a leveraged buyout in 2006. And British retailer Pets at
Home listed its shares this year after being owned by KKR.
Jana gave several reasons — weak online presence,
poor pricing strategy, high costs — for why same-store sales growth
had turned flat at Petsmart. Yet shareholders should ask why Jana did
not simply press for management changes. Instead BC Partners is left
with a blueprint for value creation. A leveraged recapitalisation,
using Petsmart’s ample debt capacity, would have given shareholders a
dividend as well as allowing them to maintain ownership. Jana
dismissed the idea.
Jana will earn a return of about 40 per cent for
a few months of investment. But the purchase price remains only 8 per
cent over where the shares traded in September 2013. It would appear
that BC Partners is set for a home run.
Email the Lex team at
Financial Times Ltd 2014