catAs we approach the bell lap in 2014, anticipated full-year performance for the pet industry is starting to come into clearer focus.  For the first time since we have been blogging about the industry, we believe projected growth might fall short of APPA projections.  The industry continues to face structural headwinds that are dampening our expectations.  Notably, three metrics we commonly rely on as relative predictors of growth are lagging the benchmarks we feel are necessary for these projections to be achieved.

  1. Personal Consumption Expenditure (PCE), which consist of the actual and imputed expenditures of households by consumption category as measured by the U.S. Department of Commerce’s Bureau of Economic Analysis, for pet related goods and services showed growth of 3.7% in 1H2014 versus 5.7% in 1H2013;
  2. PetSmart same-store-sales comps (including inflation) for 1H2014 were -0.6% versus 3.5% for 1H2013;
  3. Adoption rates, as measures by PetHealth Inc.’s PetPoint Report shows that adoptions of canines have been weak through 1H2014, with feline adoptions also lagging in 1Q2014.

There are other factors that concern us as well.  Household formation has been sluggish, wage growth is stagnant, and the retail environment is tepid, at best.  However, offsetting these concerns is data that shows pet parents are spending more than ever, alternative sales channels such as online and farm and feed and experiencing strong growth, and conventional grocery is making significant investments in the category.  From experience, we also know the pet industry is like a cat — it always lands on its feet.

As we take stock of the industry here are the key themes we see shaping the current landscape:

  • Transaction Environment Heats Up. Acceleration in pet industry transaction volume began in 2010 driven by third party investment in emerging brands. After peaking in 2011, velocity tapered in 2012 and 2013. Based on YTD numbers, pet industry transaction volume is set to rebound, led by increased M&A activity. Consolidators are looking to gain greater exposure to faster growing segments of the market. Large amounts of liquidity in the market are driving up valuations, when combined by uncertainty in the retail channel, is motivating sellers. Notably, available liquidity options have now expanded to the public markets for mid-sized pure play pet companies with strong growth impetus. As market growth slows, we expect pressure to consolidate will heighten further giving this M&A velocity uptick legs through 2015.
  • Major Pet Specialty is Getting Pinched. Pet specialty retailers are facing slower comps and market share erosion from a myriad of drivers we have highlighted over the past few years. Margin is moderating for this channel as sales growth slows, at a time when investments are needed. We believe the successful response to these threats requires bold moves not currently being contemplated. While tweaks to the merchandising mix may help, rapidly expanding omni-channel capabilities through acquisition and investment and pursuing vertical integration opportunities are needed. Imagine PetSmart’s fortune if it had invested in Blue Buffalo ten years ago. Channel barriers are coming down and retailers need to think out of the box to protect their incumbent positions. Change takes time, so do not expect a near term rebound, but do not discount the power these retailers have with manufactures to mitigate losses.
  • Channel Barriers Are Eroding. The pet industry has a high percentage of channel tied merchandise. PetSmart derives nearly 30% of its revenue from product exclusives. Brands that bridge into FDM are generally shunned by independents. As comps slows in pet specialty, emerging brands are getting anxious about their own growth prospects, causing them to consider testing the prevailing merchandise borders. As conventional grocery attempt to reverse share losses realized over the past five years, expect them to expand their efforts to recruit leading brands or incentivize those brands to develop solutions that work at lower price points. The risk for the industry is that a broader carriage of authentic and emotive brands in conventional grocery at lower price points could result in the realization of a downgrade cycle.
  • Online Independents Enter End Game. While pet products growth online continues to be robust, profits associated with these sales remain thin. Being a sub-scale online pet retailer is a losing value proposition, literally. The best situated players are developing forms of differentiation – media and education assets, prescription capabilities, and private label offerings – to offset lower margin product sales. Those who are successful will be the attractive consolidation candidates. PetSmart’s acquisition of Pet360 is consistent with this thematic. Three other independent players are currently for sale. Some of these companies will be acquired for their differentiated capabilities, but we expect the others to become zombies or go away entirely. We expect that three years from now, there will be no meaningful independent traditional pet ecommerce retailer.

For a complete summary of our pet industry market insights, please contact me for a copy of my report.

/bryan

Source: American Pet Products Association, CapitalIQ, PetSmart, Inc., U.S. Department of Commerce

Note: The purpose of this blog is for informational purposes only. The opinions expressed reflect my view as of the publishing date, which are subject to change.  While this post utilizes data sources I consider reliable, I cannot guarantee the accuracy of any third party cited herein.

no saleIn mid-August, bowing to pressure from activist investors, PetSmart announced that it would explore strategic alternatives, including a sale of the business.  Slowing sales growth and poor comps (same-store-sales, traffic, and average ticket) were cited by outside investors as a sign that management was not up to the challenge of turning around the leading independent pet retailer and creating shareholder value.  Additionally, Jana Partners, the antagonist in this saga, postulated that PetSmart would have many transaction opportunities given the liquidity in the private equity and associated debt markets as well as the potential for a highly synergistic combination with competition Petco Animal Supplies.

One month later and all quiet on the western front, for now.  Here is my assessment as to why:

  • Business Fundamentals.  Notwithstanding PetSmart’s leadership position, its business is struggling as core industry drivers shift.  The premiumization food movement has largely run its course in the dog category. Adding head winds is the fact that the pet population is not growing at a sufficient rate to bring new owners into the market who would be target customers for PetSmart’s and therefore present opportunities to sell them premium products that drive margin.  PetSmart’s latest food strategy — expanding its share of shelf dedicated to mass brands to siphon off customers who can then be converted to premium and super premium — will take time to play out.  Further, the company also faces market share erosion from independent pet specialty, online, and an increasingly organized conventional and natural grocery landscape. In order to incent shareholders into a take private or strategic sale, they will have to be offered a meaningful premium.  That a tall order given the current state of the business.
  • Private Equity Scenario Possible, but Unlikely. The concept of a leveraged buyout for PetSmart is intriguing to pundits evaluating PetSmart’s options, but the path to realizing this outcome is challenged. In round numbers the current equity price for PetSmart is ~ $71/share. Assuming it would take a 20% premium to entice shareholders to even consider a deal, this would value the equity of PetSmart at approximately $8.5 billion and the company at $8.8 billion on an enterprise value basis.  Assuming the largest equity check a sponsor would write in a mega-buyout would be 20%, this implies a take private would require just over $7.0 billion in debt and at least $1.5 billion in equity.  Based on current EBITDA figures, this would mean that PetSmart would be valued at 7.5x Debt / EBITDA, before considering the lease capitalization.  This seems significantly elevated in light of the uncertainty around growth and margin expansion.  A buyout at these levels would limit the company’s ability to make investments at a time where they are needed.  If Jana were to roll its equity the scenario becomes more palatable, but it does not solve the problem in its entirety.  Calls for looking at the equity premium based on the pre-Jana price will fall on deaf ears. Additionally, at these valuation levels a sponsor would likely be generating IRRs in the 15% – 20% range before accounting for execution and market risk.  I don’t see that return profile as being all that attractive given the risk. Third, while I could identify approximate 10 – 15 logical investors who invest in retail and could write, individually or in a two firm combination, a $1.5 billion equity check, nearly half of them are conflicted due to their investments in other pet specialty retailers or product providers.  Finally, see business fundamentals above.
  • A Strategic Deal Does Not Involve a Combination with Petco. After a private equity deal, the other most commonly cited outcome for PetSmart is a combination with Petco.  While that is conceptually attractive, its theoretically impractical if not impossible. A PetSmart / Petco combination would have ample synergies but it would significantly expand the physical footprint of the combined company, something that has been proven to be a bad strategy in this current retail environment. Second, Petco is facing the same business conditions that are negatively impacting PetSmart, meaning there is not a high likelihood that it is a sensible time for it to pursue a major deal.  That notwithstanding, a combination would likely extend the current PE syndicates ownership of Petco, which already stands at nine years versus a typical five year hold period. Next is the conundrum of who would manage the business going forward. Given that PetSmart is nearly twice the size of Petco, I don’t see current management going quietly into the night or sticking around in secondary roles. Finally, we would bank on significant anti-trust hurdles.  While in combination the business would have 27% of total pet product market share, the industry is defined by channel tied products.  Under a more narrow definition, the business would control 64% of pet specialty product sales with nearly 50% of their merchandising mix exclusive to one of the two banners. I see that as problematic.
  • There Really is Only One Logical Buyer. The only logical strategic buyer in my view is Tractor Supply.  Tractor Supply has an $8.2 billion market cap and is unlevered.  The company has experienced a 550% increase in its equity valuation over the past five years.  A key driver of this has been growth in their companion pet revenue.  A combination would help Tractor lessen its exposure to the farm segment of its business that has been challenged. Further, there is significantly less physical overlap between PetSmart and Tractor Supply, than there would be in a Petco combination scenario. Further, there would be significant supply chain synergies. That all being said, this would be a big swing for a company that does not have a meaningful acquisition history.  While sensible, I ascribe a low probability.

Net net, we believe the opportunity for a sale of PetSmart’s business to have passed. A deal remains possible, but we discount that prospect.  For shareholders sake it would be best if an outcome, sale or no sale, happens quickly so that management can return to running the business assuming it remains independent.

/bryan

Disclosure: I have a contractual relationship with PetSmart as it relates to their acquisition of Pet360.  I do not have any position in the stock of the Company, nor any intention of establishing a position.

CPO2In prior posts we have explored the notion that pet industry transaction volume is accelerating, and by all available measures in fact it is.  We have also delved into rumors of a public offering by Blue Buffalo later this year, noting the lack of public traded pure play pet companies. On Tuesday, Trupanion, a venture backed provider of health insurance for dogs and cats, announced it intended to file for an IPO on the New York Stock Exchange. We are also aware of at least one other company in the process of filing, and the concept of going public has been increasingly discussed in my industry coverage meetings.  This begs the question, are the public markets the most viable exit opportunity for a variety of midsized pet companies?

What is most notable about the Trupanion filing is the size of the company.  The business, of which I am a customer, disclosed that it was covering 181,634 pets as of March 31, 2014 and generated revenue of $83.8 million for the year ended December 31, 2013. On a quarterly basis, the company said it has posted quarter-over-quarter revenue growth since the first quarter of 2010. In the most recent quarter, ended March 31, the company reported revenue of $25.6 million, a 44% increase from the same period a year earlier.  However, also in the disclosure was the insight that the company lost $8.2 million in 2013 and has never made money.  That said, Trupanion has a huge intangible data asset, having covered a large population of pets for nearly 14 years; data that would be highly valuable to a variety of players in the pet supply chain. That notwithstanding, it is hard to believe that Trupanion, even at the most generous valuations, is going to achieve an offering price that results in a market capitalization that will motivate meaningful analyst coverage, given its size and earnings profile. Trupanion’s primary competitor, the larger Veterinary Pet Insurance Company, remains private. Other pet insurance companies have not met with favorable results in the public markets due, primarily in my estimation, size.

Often public filings are practical way of putting a “For Sale” sign on a business. Whether or not this is Trupanion’s intention, the mere optionality of a public listing would act as another catalyst for industry transaction volume.  Further, if successful it could pave the way for other midsized pet companies to explore the go public alternative.  Certainly companies such as Radio Systems Corp, Hartz Mountain (which is owned by publicly traded Uni-Charm Corporation) and United Pet Products (owned by publicly traded Spectrum Brands) would be well situated to tap the public markets for liquidity or acquisition capital. Further, brands such as Champion Pet Food, Dosckocil Manufacturing, Freshpet, Kong Company, Nature’s Variety and Merrick Pet Care would gain another exit alternative.

The analysis above separates the issues of “could” from “should”. While Trupanion has a clear path to a diversified growth plan through its data asset, the ability to sustain public company momentum for many of the companies listed above is limited. We have already questioned whether the much bigger Blue Buffalo can remain channel tied as a public company and it dwarfs most of the above listed companies in size and brand awareness.  However, more public pet companies would be good for the industry, which generally lacks a broad set of consolidators.

/bryan

 

 

 

 

chicken_little_funny-t2Last week, PetSmart announced first quarter earnings. The company reported slowing growth and negative same store sales.  I believe it was the first negative comp quarter in 16 years for PetSmart. Management took full year comp store guidance down to zero, from 2%. The stock fell approximately 8% on the news, taking the year-to-date loss to -22%. Naturally, this has led some to question whether the sky is falling for PetSmart, the pet industry, or b0th.  To begin to answer these questions, we first need to uncouple them.

To assess the performance of PetSmart, separate and distinct from the industry, the best place to start seems to be in the context of broader retail.  Anyone who was surprised by softness in PetSmart’s numbers has probably not been keeping their pulse on the four wall retail environment. In January, 20 retailers pre-announced earnings shortfalls. This was the highest number post recession and on par with the levels the industry experienced in third and fourth quarter 2008. Howard Schultz blamed it on the Internet, others cited weather, consumer confidence, and wage stagnation. Notably, both Wal Mart (-0.4%) and Target (-2.5%) produced negative comps for the 1Q2014. We cataloged 1Q2014 revenue growth, EPS growth and performance versus guidance of some of the major big box retailers here — 1Q Retail EPS Performance. Notably, PetSmart was the only company within this comp group to exceed guidance on earnings. What this speaks to is the fact that PetSmart has a very good handle on the cost side of their business. While they experienced slight margin compression, unlike its peers PetSmart does not appear to be chasing the middle market consumer through a promotional discounting strategy. This underscores PetSmart’s relative market position in the industry as well as the ongoing attractiveness of the pet category.

When we shift our analytical purview to the broader industry, the cause and effect relationship is more apparent. While total consumer spending on pet products and services continues on a positive growth trajectory, total growth has been slowing, driven by a falling comps for pet products (see graph below).  What this demonstrates is that the industry is maturing and that drivers are changing.  As the pet food upgrade cycle has tapered products sales growth has slowed.  However, as a wellness focus has ascended, services revenue growth has accelerated.  Given that services is a much smaller part of PetSmart’s mix, it was bound to experience the malaise of the industry’s product sales growth trajectory.  PetSmart’s first quarter revenue growth was more or less inline with the growth in industry product sales.  Additionally, keep in mind that total pet industry sales, as measured by consumer expenditures by category, grew 12.6% between 2011 and 2013; at some point the “law of large numbers” catches up to everyone.Slide1A second lens we like to use to assess pet industry performance is the rate of adoptions.  An increase in ownership and multi-pet householders means an increase in expenditures.  However, as evidenced by the chart below, the growth rate for companion animal adoptions, as measured by shelters monitored by Pethealth, Inc., slowed markedly in 1Q2014, especially for dogs.  That said, a similar contraction was evident in 2011, a year of strong industry growth (4.7% according to the American Pet Products Association).  As such, we think it is too early to call it a year for the industry, but in combination with slowing pet products sales it is cause for some consternation.Slide2In looking at the total body of available data there is reason to be concerned about the pace of pet industry growth but not the overall health of the industry.  Slower growth has been anticipated and therefore should not come as a surprise. The industry has been defying skeptics for sometime, but all good things experience a tapering.  Further, it is too early to call the year from any analytical perspective.  The pet industry remains very attractive long term and while online players, adjacent market competitors, and emerging brands have eroded the leadership of both major retailers and product manufacturers, the threat to their overall industry position remains low.  Generally speaking, physical retail has experience a much more significant contraction, driven by share shift to mobile and online, recently even after you factor out the weather.  In that context one can view PetSmart’s performance in a relatively positive light.

I think I can say with authority, when it comes to all things pet there may be clouds in the sky, but it is not currently falling.

/bryan

iamsA theme we have been emphasizing in our missives about the pet industry has been the concept of change. Industries evolve for a variety of reasons — innovation, regulation, exogenic shock, mergers/acquisitions, among others. Our view is that the pet industry is changing for another reason — slower growth. The key drivers of pet industry performance over the past five years — the humanization of pets and the pet food upgrade cycle — appear to have peaked and, as a result, we are seeing divergent performance among industry participants as new core themes take hold; innovators continue to take share from incumbents. A logical reaction to this state of play is an increase in deal velocity — incumbents buy innovators, investors fund innovators to accelerate their existing or potential advantage, and large companies consolidate to drive economies of scale. Notably that is exactly what we are seeing and some of those deals could have far reaching implications. The case of Mars, Inc. buying the Proctor & Gamble pet portfolio is an example of this reality in practice.

When Mars acquired 80% of P&G’s pet food portfolio for $2.9 billion, it should have come as no surprise P&G was largely exiting the pet space. P&G management had been actively seeking to pair its exposure to non-core lines of business and a buyer for their pet brands has been sought for several years. That Mars was on the other side of the transaction, was not a real surprise. After all, only a small handful of companies in the space could have taken a deal of this size down, Mars being one of them. However, Mars has been increasingly active in its food business overseas at the expense of its pet portfolio so many discounted the possibility. On its face, the deal appears to be attractive for Mars. Among the acquired brands, Iams fits nicely into their merchandise matrix, and mitigates the risk they would fall to the number three player in the most important pet market should Big Heart Brands have scooped up the assets. Eukanuba is largely redundant and Natura is a wild card given its recent recalls. What we suspect happened was Mars had sought to buy Iams for some time, and eventually the sides agreed to a deal where P&G threw in more assets (Eukanuba and Natura) and Mars, in turn, agreed to throw in more money. The $1.6 billion portfolio sold for 2.25x revenue after considering the retention of ownership.

While the deal backdrop consists of some mildly compelling drama, more interesting is what it all could mean in terms of change. Of significance, Mars is largely focused on the mass channel, and logic would dictate that they would seek to move Natura into mass at a lower price point. Given the recalls that is where Natura might have some residual value. That scenario could have significant implications for pet specialty assuming a Natura launch is a prelude to other natural brands entering the FDM channel under their flagship brand. The would be a big win for consumers — premium natural pet food at a mass price. This would add additional fuel to the notion that Blue Buffalo, if public, would pursue this very strategy. Further, Big Heart Brands, through its Natural Balance transaction, would be well situated to join this movement despite the promise to keep the brand in channel. The net result is the potential for both share and channel shift but also pet food deflation. Falling food prices would have significant implications for major pet specialty and independents. On a price per pound basis, premium food trades at 2x-3x price premium and a 2×-2.5x profit premium. Price compression would therefore have a significant impact on margin for pet specialty players.

We concede that the scenario above is speculative, but one that increasingly has the potential to be realized in whole or in part. Further, it is one that we would not have given much consideration 12 months ago that everyone should now take seriously.

/bryan

images7CBOOO04

With the benefit of hindsight, we know the pet industry produced another solid year for performance in 2013, generating growth of 4.5%.  Industry revenues climbed to $55.7 billion, with growth exceeding forecast by 0.2%.  Revenues benefited from inflation of 1.3%, including food price inflation of 1.1%.  Growth was relatively uniform across the core segments with services (+5.0%) and veterinary care (+4.9%) leading the way.  While growth is projected to accelerate to 5.0% in 2014, we expect companies in the space to experience more widely divergent fates.  Our thesis is that the industry is undergoing structural changes that will result in stronger performance from the leaders and slower performance from the laggards.

Structural change is being driven by slower growth in the key drivers of performance over the past five years.  On the retail side, we are seeing smaller retail chains ascend at the expense of large pet specialty players. Notably, PetSmart same-store-sales slowed to 2.0% in 2H2013.  In contrast, PetSmart produced, on average, quarterly same-store-sales growth of 5.2%  from fiscal 2010 through 2Q2013.  Further, among top 25 pet retailers, 55% of box growth came outside of Petco/PetSmart in 2013, up from 41% in 2011. Finally, ecommerce growth in pet products is expected to accelerate from 35% in 2013 to 38% in 2014 as online pet venues both consolidate and proliferate.

Product manufacturers are also experiencing the impetus for change.  Looking for new sources of growth they are pursuing new channel strategies.  Big Heart Brands’ acquisition of Natural Balance Pet Foods and Nestle Purina PetCare’s acquisition of Zuke’s underscore this theme.  Notably,  the number of companies with pet specialty distribution that exhibited at Expo West (meaning they are looking for Whole Foods distribution) doubled in 2014. Additionally, the pending Blue Buffalo initial public offering is, in our view, a prelude for the brands entry to mass. Collectively, these companies will blur the lines between sales channels for pet consumers.

Net net, change is the air and change drives deal velocity. Below are the other key pet industry trends for 2014:

  • Prelude for Sale or a Move to Mass? In March, news leaked that Blue Buffalo Company Ltd. had selected underwriters for an anticipated 2014 initial public offering. When the company took a leveraged dividend in 2012, we predicted a sale or filing within three years. Blue generated $600 million in sales in 2013 and EBITDA margins are said to be nearing 20%. The company is approaching the size of The Nutro Company when it was acquired by Mars, Inc. While Blue has no lack of suitors, the purported asking price of $1.5 – $2.0 billion would be hard for even the largest companies to swallow in an environment where product recalls can rapidly erode brand equity. A listing would place a public sale price on the business, which may facilitate a transaction, but we think the more likely outcome is that Blue is headed to mass. The growth requirements for a public company are more than the pet specialty channel alone can support. If the brand jumps to FDM under its existing label, which we think is possible, you can add another brick in the wall of change.
  • Natural Leads Grocery Resurgence. Grocery has been steadily losing market share to pet specialty post recession. Simply put, FDM has been out-thought and out-merchandised. Lacking access to key independent brands coupled with limited selection depth, consumers have migrated their spend elsewhere. Grocery buyers and store planners did not recognize the strategic value in the pet aisle. However, this is changing. Major chains such as Kroger and Whole Foods have or are set to launch large pet assortments made up of staple, emerging, and house brands system-wide. Increasingly, brands are being built for the grocery channel or seeking to make the jump. Notably, the number of pet consumables companies exhibiting at Expo West doubled in 2014. Given its size and a lack of compelling incumbent brands, the pull of the FDM channel is strong. As the channel regains momentum outside of the natural and gourmet segments, it has the potential to change where consumers shop for premium and how brands are built.
  • Change Will Drive Deals. As manufacturers, retailers, distributors, and brands seek to align themselves with emerging realities, we expect to see increased deal activity. Deal velocity in sectors such as consumables should accelerate both acquisitions and private placements. Specialty retail, a sector whose transaction volume has been rather muted, should see a resurgence as leading micro-box and online platforms enjoy increased capital formation to expand their footprint or are acquired by mass and major pet specialty retailers seeking to expand omni-channel capabilities. For the most attractive properties, valuations will increase due to broader and deeper interest from buyers and investors.

Contact me for a copy for my report.

/bryan

Sources: APPA, Cleveland Research, New Hope Natural Media, Pet Business, Reuters, U.S. Bureau of Economic Activity

accross the pongI often talk about PetSmart and VCA Antech being proxies for the direction and health of the domestic pet market because of the transparency it provides us into consumer pet product and healthcare spend through quarterly earnings reports and third party equity research.  However, the U.S. market should not be viewed as a proxy for the global pet industry.  Absent the transparency we enjoy through publicly traded U.S. pet companies our view of global pet markets is tied to a reliance on third party data firms (Euromonitor, Mintel, etc.). While these firms produce excellent research, there is an inherent latency to their content, making it hard to measure real time performance.  A partial solution to that problem looks to be coming in the form of a public listing for the UKs largest pet retailer, Pets At Home, Ltd. (“PAH”).

Earlier this week PAH filed for an initial public offering on the London Stock Exchange.  The company plans to raise £275 million, giving PAH a valuation of around £1.5 billion. Thew company operates 369 retail stores, 246 small animal veterinary centers and 116 in-store grooming salons across Britain.  Estimates puts the company’s share of its home pet retail market at around 12%. The British market is highly fragmented, with PAH’s five largest competitors totaling just 225 stores combined. The company should have ample opportunity to grow both its retail base and veterinary services concept given these market dynamics. PAH plans to open an additional 131 stores, 400 veterinary clinics, and 200 grooming salons.  The company would be the only listed pet retailer in Europe.

PAH was acquired by a private equity consortium led by U.S. based Kohlberg Kravis Roberts & Co (“KKR”), which also owns Big Heart Brands, the Del Monte Foods pet products division, in January 2010 for £960 million.  At the time, the company had trailing twelve month revenues of £402 million and EBITDA of £70 million, resulting in an implied valuation of 2.4x Revenue and 13.6x EBITDA.  Bridgeport Equity, the seller, had acquired the business for £230 million in July 2004. Assuming a £1.5 billion enterprise value for PAH, it would imply that the value of the business has increased over 55% since being taken over by KKR and friends.

According to the recently announced listing, PAH had sales of £598 million for its year ending on March 28, 2013. The company said its revenue increased 11.7% for 40-week period ending on January 2, 2104.  Extrapolating this growth for the full year yields revenue of approximately £700 million, resulting in an implied valuation at listing of 2.14x Revenue. At the time of its listing PAH expects EBITDA of £110 million, resulting in an implied valuation of 13.6x EBITDA.  This would value PAH at multiples nearly two times those prevailing for U.S. leader PetSmart (1.0x Revenue and 7.3x EBITDA) despite the two companies having similar same-store-sales for the prior 12 month period.  While PAH has produced better topline growth over the past year versus PetSmart and enjoys a better profit margin profile due to its services revenue, this still amounts to a very healthy premium even after you account for the 17% decline in PetSmart’s stock since October 2013.

Whether PAH is overvalued or correctly valued is likely a debate with no end, the truth likely lies somewhere in the middle.  Either way, KKR has made a handsome return in a short period, even after you consider the company has reinvested over £100 million in growth initiatives.  However, the real value for those that follow the industry, will be increased data and transparency.  While PAH’s market capitalization will be approximately 37% of PetSmart’s, it should receive solid coverage from equity analysts with strong UK sales and trading networks.  That coverage will help us better pinpoint how the British pet market is performing, and ultimately enable us to draw parallels between a key foreign market and our own as well as the leading retailers in both geographies.

/bryan

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