Petco Ping-Pong
Equity companies are getting more aggressive with ever bigger deals. Now it seems they are even buying and selling the same property over and over. Their angle of attack on the market is quite different from that of companies inside the industry that might want to make an acquisition. And they certainly push up the price of deals. Now comes a buy-out that I find confusing and bizarre, though the regular business press is treating as just another deal.
Petco Animal Supplies, the #2 pet supply retail chain in the US after Petsmart, announced that it would be brought private by a group of equity funds. Déjà vu. In 2000, Petco announced that it would be brought private by the same group of equity funds. What happened?
Founded in 1965 as a single local pet supply store, Petco started acquiring other chains in 1988. In 1994, it went public. By the end of the decade, it had acquired over 20 pet supply chains across the country and had hundreds of retail locations.
In 2000, the company was taken private by equity companies Leonard Green & Partners and Texas Pacific for $600 million, According to one article ("Petco throws Wall Street a bone", DSN Retailing Today, 1/21/02) the reasons were two: the deluxe Iams pet food brand was bought in 1999 by Procter & Gamble. That brand, once a semi-exclusive offering from Petco, became generally available in supermarkets thanks to P&G marketing effort. Seconds, Petco had been involves in the notorious and foolish scramble for Internet pet supplies dominance.
Fifteen months later, Petco was returned as a public offering on the NASDAQ exchange; gaining over $275 million. The equity investors held on to a chunk of the stock, selling it off in 2004, for major profit, as the company's value, more than doubling their original stake.
The company expanded to over 800 stores in 48 states. But in the past few years it has been struggling, with increased competition in a mature market. Last year, on sales of $1.9 billion, it managed to retain only $76 million. That reflects a 10% increase in income, but a nearly 9% decline in profit. (It must be said that Petsmart, with twice the gross income doesn't do much better.)
Now Texas Pacific Group and Leonard Green (again!) are buying the company for $1.8 billion. The buyers must believe that they can goose profits while maintaining growth in volume, if only to hand the company with yet another IPO in a few years, or a sale to another equity firm.
To an outside observer, it's hard to see how $75 million, or even four times that amount of net income, could service the debt. And it's hard to see much growth potential, as the country is well covered and there's no reason to believe that a major increase in pets is around the corner. Yes, there's always cost cutting. But hadn't Petco gone through this just a few years ago, under the same supervision? Did Petco so quickly lapse back into lavish multi-million dollar wastefulness? I doubt it.
But these equity guys are the experts. They've already squeezed hundreds of millions in gains out of the company, and they must think there is more yet to come. Can we expect an IPO in, say, 2009?
What don't I get?
