Coverage: Investors pay $8.3 billion for PetSmart

While reported valuations varied slightly, BC Partners is paying more than $8 billion for PetSmart to gain access to millions of people who spend loads of money on their pets for treats and toys.

Bloomberg’s David Welch had these details about the deal:

PetSmart Inc. (PETM) agreed to be bought by a group led by BC Partners Inc. for about $8.3 billion in the largest leveraged deal for a U.S. company this year.

The group will pay $83 a share, or about 39 percent more than the company’s price on July 2, before activist investor Jana Partners began pushing for the sale, according to a statement today. Including debt, the total value of the deal is about $8.7 billion, according to the statement.

BC Partners beat other bidders including Leon Black’s Apollo Global Management to close the deal after a weeks-long auction that came down to negotiations over the weekend. People with knowledge of the matter said on Dec. 13 that Apollo was nearing a deal that valued PetSmart at about $8 billion.

“It was a very competitive auction,” Raymond Svider, a managing partner at BC Partners said in a telephone interview. “The company should never have been put in play. Growth slowed and the market overreacted. We feel fortunate.”

In a story for The Wall Street Journal David Benoit and Dana Mattioli talked about how BC won the bidding war for the pet retailer:

BC prevailed in the auction over rival buyout firm Apollo Global Management LLC.

PetSmart began contemplating a sale this summer amid pressure to do so from shareholders including Longview and activist investor Jana Partners LLC.

Jana disclosed a 9.9% stake in the company in July. Days after that, Longview, a longtime PetSmart investor, sent the board a letter urging it to hire bankers to consider a deal or other options.

The takeover would be a rare private-equity buyout in a year in which such firms have been priced out of the mergers-and-acquisitions market by lofty stock prices.

Michael J. de la Merced wrote for The New York Times that it’s the biggest leveraged buyout of the year:

Sunday’s agreement represents the biggest leveraged buyout in a year that has been defined by huge mergers — most of which have been by corporate buyers, not private equity firms.

PetSmart operates more than 1,300 pet stores in the United States, Canada and Puerto Rico.

JPMorgan Chase and the law firm Wachtell, Lipton, Rosen & Katz advised PetSmart. Simpson Thacher & Bartlett and Ernst & Young provided advice, while Citigroup, Nomura, Jefferies, Barclays and Deutsche Bank provided debt financing.

Ed Hammond’s story in The Financial Times said that PetSmart became a target when it missed earnings estimates in May:

Problems for Petsmart began to emerge in May, when the company missed earnings expectations in the first quarter and lowered its guidance for the rest of 2014. The group has suffered from intense competition from online retailers and from rival Petco’s smaller store format.

At the time, David Lenhardt, chief executive, concentrated on potential business improvements, saying it would launch new advertising campaigns, improve its pet food offerings, and beef up its website.

The buyout is the largest take-private transaction of 2014, eclipsing Onex’s €3.75bn for SIG Combibloc, the drink carton maker, last month and Apollo’s $1bn takeover of Chuck E Cheese.

Private equity funds have been frustrated in the wave of mergers, as strategic corporate buyers have consistently outbid them on any assets that do come to market.

Antione Gara wrote for Forbes that Jana was the big winner in the deal after agitating for a sale.

In Safeway and now Petsmart, Jana identified large publicly traded retailers that could be swallowed up by private equity firms in spite of their reticence to do mega buyouts and doubts about the ability of banks to finance highly leveraged deals amid new regulations.

With PetSmart, Jana saw a specialty nationwide pet foods and supplies seller with bleak growth prospects but a strong balance sheet and a stable core business that would garner the interest of private equity buyers if it was put up for sale. While takeovers nearing $9 billion in enterprise value are now rare given PE firms’ reluctance to pool their money together on deals, Jana believed the company’s low debt levels and high expenses would find interest from turnaround investors.

The hedge fund was a holder of Petsmart’s shares in early May, and then it began aggressively buying stock after the company reported disappointing first quarter earnings and a weak guidance on May 19, causing the stock to plunge nearly 10%. Jana acquired over 5 million Petsmart shares between May 20 and July 2 at an average price around $58 a share. The hedge fund also acquired options to buy 4.7 million Petsmart shares at $50 apiece.

This is a great deal for those who hold a stake in Petsmart. The bidding war put the shares at a higher premium than many expected. The underlying business is a good one, especially given the rise in pet ownership and how much money people spend on their furry friends. But the big winner here is likely Jana for pushing it through.