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PetSmart, Inc.

 
 

AVR Status

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.

 

 

 

For information presented to prospective investors in the buyout's $1,900,000 senior unsecured notes analyzed below, see

 

Source: Standard & Poor's Ratings Services, February 9, 2015 report

PetSmart Inc. Downgraded To 'B+' From 'BB+' On Debt-Funded Private Equity Acquisition; Off CreditWatch; Outlook Stable

Publication date: 09-Feb-2015 08:57:49 EST

  • A consortium of private equity investors led by B.C. Partners Inc. is
    acquiring PetSmart in a transaction valued at approximately $8.4 billion,
    funded by $6.2 billion new debt and $2.1 billion equity.

  • Higher debt will hurt credit protection measures, which results in our
    reassessment of the company’s financial risk profile.

  • We are therefore lowering the corporate credit rating on PetSmart to ‘B+’
    from ‘BB+’.

  • We are assigning our ‘BB-’ issue-level rating to the company’s $4.3
    billion term loan and ‘B-’ issue-level rating to the $1.9 billion senior
    unsecured notes.

  • The stable outlook on PetSmart reflects our view that the company can
    achieve performance growth on cost savings initiatives and some debt
    reduction over the next year.

NEW YORK (Standard & Poor's) Feb. 9, 2015--Standard & Poor’s Ratings Services lowered its corporate credit rating on Phoenix, Ariz.-based pet retailer PetSmart Inc. to ‘B+’ from ‘BB+’. At the same time, we removed the rating from CreditWatch, where we placed it with negative implications on Dec. 15, 2014.

At the same time, we assigned our ‘BB-‘ issue-level rating to the company’s proposed $4.3 billion seven-year term loan, with a ‘2’ recovery rating, indicating our expectation for substantial (70% to 90%) recovery in the event of default. In addition, we rated the $1.9 billion unsecured notes due 2023 ‘B-‘ with a ‘6’ recovery rating, indicating our expectation for negligible (0 to 10%) recovery.

Under the transaction by private equity owners, Argos Merger Sub Inc., the acquiring entity, will merge into PetSmart, with PetSmart continuing as the surviving entity and borrower under the term loan and unsecured notes. Our analysis assumes the transaction closes as proposed.

"The downgrade reflects our view that acquisition-related debt results in higher leverage, resulting in weaker credit protection measures. We expect the transaction to close by mid-2015 for a total consideration of about $8.4 billion, of which $6.2 billion will be financed with debt. Pro forma for the transaction, we estimate leverage of about 6.2x (on a lease-adjusted basis at third quarter 2014)," said credit analyst Andy Sookram. "Although we believe PetSmart will use most of its of its free cash flow for debt reduction, we expect leverage in the high-5x area in the next year. We are therefore revising our assessment of its financial risk profile to "highly leveraged" from "intermediate"."

The stable outlook reflects prospects for performance gains with EBITDA margins improving to the high-18% area. We believe the company will continue to invest in e-commerce initiatives, which should help to drive customer traffic in-store and online. We forecast leverage to improve to slightly under 6x by year-end 2015 on earnings improvement and modest debt reduction.

Upside Scenario

We would consider raising the rating if PetSmart were to reduce debt such that it sustains leverage under 5x and we have clarity that financial sponsor ownership would decline over time. We believe this scenario could occur if debt declines by about $1.5 billion or EBTIDA increases by nearly 25%. We would also need to see financial sponsor ownership decline or be convinced that the potential to add debt for shareholder remuneration was less likely.

If PetSmart’s financial sponsor ownership declined or financial policy clearly shifted from the possibility of further releveraging, we could view financial policy more favorably and could revise our financial policy modifier to ‘FS-5’ from ‘FS-6’.

Downside scenario

We could consider lowering the rating if operating performance worsens from poor execution of its e-commerce initiatives, or if competition increases, especially from large discounters and online retailers. Such a scenario could lead us to revise the business risk profile to "fair" or lower. A negative rating action could also result from material debt-funded dividends to the sponsors that would allow leverage to remain over 6x on a sustained basis. Under this situation, we would reassess financial policy to ‘FS-6 minus’.

RELATED CRITERIA AND RESEARCH

Related Criteria

Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings referenced herein can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.

Primary Credit Analyst:

Andy Sookram, New York (1) 212-438-5024;
andy.sookram@standardandpoors.com
Secondary Contact: Mariola Borysiak, New York (1) 212-438-7839;
mariola.borysiak@standardandpoors.com

 

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