Financial Times | Lex, December 15, 2014 commentary: "Petsmart: hitting it out of the park | If private equity is buying, think carefully about selling" [Smart investors take advantage of forced sale]

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PetSmart reported voting approval on March 6, 2015 by 74.4% of outstanding shares for the company's definitive agreement to be acquired by a consortium led by BC Partners, with the participation of existing shareholder Longview Asset Management, at a price of $83.00 per share, as presented in the company's February 2, 2015 Definitive Proxy Statement, and the merger became effective on March 11, 2015. Based on its review of suitability, the Forum will offer support of shareholders who reserved rights to consider appraisal for realization of the company's intrinsic value.

Source: Financial Times | Lex, December 15, 2014 commentary

FINANCIAL TIMES

ft.com/lex

December 15, 2014 5:09 pm
Petsmart: hitting it out of the park

If private equity is buying, think carefully about selling

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 retailer Petsmart was 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 lex@ft.com

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