skyThe pet industry continues to work through a series of fundamental issues — demographics, channel shift, brand attributes — that, over time, are expected to reshape the competitive landscape.  While fundamentals are favorable — consumption, consumer confidence, employment, real wages, housing — these tailwinds are not sufficient to float all boats.  When the market bifurcates into “leader” vs. “laggard”, and the historical leaders now find themselves playing catch-up, you get dynamic market shifts.  While there are signs of a transition in process, this cycle is only now gaining momentum, and inertia will take some time.  In the interim, here are the key trends we are keeping an eye on over the forward six months:

  • Growth On Pace for Anticipated Uptick.  The pet industry experienced a relative malaise in 2015, with industry growth, as measured by APPA figures, slowing to 3.8%, despite a 0.3% uptick in performance of the food category, the largest component of pet spend (~38%), to 3.5%. Based on macro indications the industry appears on pace to exceed projected 2016 growth of 4.3%, driven by an acceleration in consumables.  That said, a rising tide is not lifting all boats. Growth is manifesting itself in a much more pronounced way, from a percentage standpoint, among independent retailers and brands, from brands that have managed the digital migration of their message and products effectively, and from brands that rely on or incorporate alternative form factors. Growth, in isolation, masks a myriad of problems. Large retailers and major pet food marketers risk further erosion of their franchises if they don’t adapt more quickly to emerging ownership and channel realities.
  • Industry Working Through Transitionary State. The foundation of our Spring 2016 report was the observation that the industry was undergoing a restructuring, and would remain that way throughout 2017. This restructuring involves tactical changes to embrace evolving ownership demographics and consumer behavior patterns. We are seeing signs that many key players are in fact moving to action. A number of larger manufacturers are actively working through their digital strategies and assessing how they develop both ecommerce and customer analytics capabilities. Mid-sized box chains and distributors are evaluating alternatives for addressing online gaps. Several key pet specialty brands appear poised to move to FDM. Finally, online retailers and large distributors seem to be headed towards a convergence. While not all the key transitory events identified are in play, the industry is shifting before our eyes. These changes should drive increased M&A activity.
  • Small Box World is Consolidating.  The rise of the independent pet channel has been one of the greatest value creators for the pet industry post-recession. Growth in small box and mid-sized chains has paid significant dividends for the brands that cater to them, the distributors that serve them, and the owners of the most professionalized operations. This channel is viewed as the champion of the consumer, providing them with education and advice and, as a result, has attracted a slew of authentic brands seeking to monetize this connection. Now the channel is consolidating. While acquisitions by Tractor Supply, Pet Supplies Plus, and Pet Valu are most notable, so to is the external communication from companies like Chuck & Don’s and Bentley’s Pet Stuff that they are seeking acquisition opportunities. Many chains will have to choose whether to participate in this race for scale and geographic expansion, or temper their growth expectations.  Long term, omnicannel will win in both broader retail and pet.  However, to develop these capabilities a certain scale is required in order to justify the investment.
  • Deal Volume Increases but Not Realized Outcomes. When industries undergo evolution, transaction velocity predictably increases as companies try to reposition themselves for the next growth cycle. This phase began in 2H2014 when pet industry M&A activity spiked and continued through the record year of 2015.  While we continue to see elevated levels of market activity in 2016, it has yet to translate into a pace of closed deals that would match the prior year period, making it likely 2016 will be a down year for closed deals.  The reasons for this are multi-faceted. First, when large strategic buyers are working through their own portfolio issues they tend to prioritize their current brands at the expense of M&A. Second, as buyers step further out of their comfort zone, they tend to be more price sensitive. Finally, a number of buyers continue to digest their acquisitions from 2015, making them less aggressive on the M&A front. Couple this with continued high valuation expectations on the part of lower middle market sellers and you end up with more failed sale processes.

As always, a complete copy of our 2H2016 industry report is available by email.


Note: 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.

dog-bowlBeing early, wrong, or both is no fun, at least not in the case of making industry predictions (traders will also say early is also wrong).  And when it comes to our views on the waning of the pet food upgrade cycle many people have made us aware that we were either early or wrong (or both!).  However, when you make market predictions based on limited information you are going to be wrong, sometimes with regularity (see my view on the inability for private equity to acquire PetSmart here, as just one notable example where I have missed the mark, but at least I correctly predicted that they would not combine with Petco, see here), and we are okay with that.  That said, here I am not sure we were either wrong or even that early in this case.

In 2013, we began to beat the drum about the deceleration of the pet food upgrade cycle (for those of you scoring at home you can see comments here and here).  Our view was that basic economic realities were fundamental headwinds — stagnant wage growth, slowing pet replacement, growth in small dog ownership, and continued food price inflation.  We then pointed to PetSmart comps going flat to negative, and fully negative ex-inflation, for most of 2014, had to be a sign this cycle was on life support.  However, all of these factors were explained away by other data — accelerating pet product Personal Consumption Expenditures in 2015 (Bureau of Economic Analysis), recovering pet adoptions in 2015 (PetPoint), accelerating pet food spend in 2015 (APPA), growth in alternative form factor pet food (GfK), mismanagement at PetSmart (pick your favorite equity analyst), and the successful Blue Buffalo IPO.  In short, for every fundamental premise we had on the offer, there was a data set that one could point to bolster their thesis.  The issue was that the evidence used to perpetuate the myth that the upgrade cycle was alive and well was easy to debunk, but nobody want to hear it, and they still don’t.

Fast forward to today, and we now see increasing direct evidence that supports our thesis.  First, last month The J.M. Smucker Company trimmed its full year earnings forecast on the basis of declining sales of pet food for the quarter, down 6%. While there was a positive spin around the narrative (difficult comps due to prior year sell-in, strong new brand sales prior year), it is concerning.  The company expects weakness to persist throughout the balance of the year.  Second, our survey of private mid-market pet food marketers ($100+ million in revenue) indicates that the malaise Smucker’s is experiencing is not isolated, though the magnitude is greater.  Most of the company’s we surveyed offered full year views of 0% – 2% growth domestically. Finally, Tractor Supply, which does a significant percentage of its business in livestock and pet supplies (44%), trimmed its quarterly earnings forecast and full year outlook for the second time this year.  The company now expects same-store-sales for the quarter to be flat to down 1% after being up 2.9% in the prior year period. While we may not think of Tractor Supply as the prime destination for the premium pet food consumer, they do sell a considerable number of premium brands – Blue Buffalo, Merrick, Natural Balance, and Wellness, among others.  The company pointed to slowing growth in the C.U.E. (consumables, usables, edibles) business. Translating the semantic hieroglyphics, this means their pet and animal products business, including pet food.  We suspect Tractor Supply is not alone.

What is more important here than being right or wrong as it relates to the state of pet food, is what will the implications be for the capital markets of the death of the cycle.  We do not believe that slowing pet food sales, premium or otherwise, is going to hamper capital formation. There remain multiple heuristics of emerging brands garnering footholds to grow their business rapidly to $25 – $50 million in sales with limited capital investment.  The scarcity of these businesses, coupled with the amount of institutional capital chasing these opportunities, means that growth equity investments in pet food, distinct from treats, will remain robust.  Of greater significance is whether this will jump start a new M&A cycle.  While large strategic acquirers tend to have a negative M&A bias during period of weak financial performance, it might just be such that they will uses these events to recognize the need to buy into niches that represent the future of the industry.  This could push multiples, which have been waning, albeit, at the margins over the past three years to begin to trend up.  Further, the fact that broader M&A statistics indicate we are almost certainly at the end of this M&A cycle, might cause more sellers to come to the table.  Watch closely for M&A volume in this segment to tick up over the coming year.


Note: 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.





cowboyIn prior posts I have lamented about the reality that the pet consumables industry lacks a deep pool of brand consolidators.  Once you get past the “big three” (Nestle Purina, Big Heart Brands (The J.M. Smucker Company), and Mars), the industry possess a limited set of buyers who operate brand portfolios and who have deep pockets to afford the most attractive properties at prevailing transaction multiples.  That is not to say there are no other capable buyers of pet consumables properties, but rather that the current valuation paradigms of the second tier of buyers represents a significant drop from that of market leaders, whom simply can do more strategically and operationally with the assets they acquire.

Conventional wisdom has been that, over time, this reality would work itself out in four ways. First, was that the largest Tier 2 players would become aggressive in their M&A push in an effort to challenge the market leaders. Save for Spectrum Brands, who has been active, acquiring Proctor & Gamble’s European division, which includes the Iams and Eukanuba brands, and Salix Animal Health, a leading pet treat manufacturer, this segment of buyers has been largely stagnant.  Hill’s Pet Nutrition has participated in a few known M&A processes, but never at valuation levels necessary to challenge the companies it is chasing. Second, was that large private players would become more aggressive in acquiring emerging brands before they became of interest to the large industry players, creating a second economy, so to speak, for sellers.  Save for WellPet’s acquisition of Sojos, activity within this class of competitors, at least for consumables companies, has been muted.  Generally speaking, these companies have either opted not to run brand portfolios, or chosen to build rather than buy.  The third leg of this stool was that foreign buyers would enter the market.  Save for Agrolimen SA’s joint venture with Nature’s Variety, we have only heard crickets from the foreign buyer community on notable deals. Finally, the notion was that human food companies would crossover into pet in an effort to capture the growth and margin available to leading industry players. While many have talked-the-talk, they have not been able to close, primarily losing out to industry players on a valuation basis due to operational synergies.

This fact pattern is troubling for many of the emerging authentic brands in the category, who don’t want to be perceived to be selling out a major industry player. For some, the thought of a foreign buyer or a consumer packaged goods or natural food company acquiring them remains seductive.  So why has the industry seen such limited crossover appeal to these constituencies?  The answer has both quantitative and qualitative underpinnings.

The pet industry possesses a myriad of large foreign operators in the consumables sub-segment.  According to, three of the world’s 10 largest pet food players are foreign — Unicharm, Deuerer, and Heristo AG.  Additionally, there are five other foreign market players (mostly Western European) producing between $400 – $600 million in annual revenue. Based on the prevailing margin profile for a pet consumables business, these companies would seem to have sufficient financial wherewithal to acquire a mid-sized U.S. pet food business. However, when you analyze this population, the following common traits emerge — largely private companies with closely held/family ownership (Unicharm being the most notable exception), owned manufacturing assets, and a limited acquisition history.  Where these companies have been acquisitive the targets have been in the buyer’s home market or in direct geographic adjacency. While some of these acquisitions have been of reasonable size, $50 – $150 million, it is clear that most of these companies are most comfortable sticking to what they know or prospecting only as far geographically as required.  Further, when you talk to executives of these companies they tend to cite three primary concerns about U.S. pet consumables M&A — a) a lack of knowledge of the U.S. pet food market, b) a lack of internal M&A capability internally, c) a perception that the market is hyper competitive and therefore of limited attractiveness, and d) the deal prices are high in light of these competitive concerns.  It seems logical to conclude that these dynamics are only likely to change if, and when, these companies experience a slowdown in their core business, if ever, and/or a professionalization movement stimulated by private equity drives them towards these outcomes.  Of note, some of the smartest U.S. private equity funds with a heritage in pet consumables are actively targeting Western Europe for their next pet deal, but I view the possibility of these parties being players for U.S. assets as being a ways off.

Consumer packaged goods companies, as potential buyers of pet businesses have had their own unique limitations.  Most notably, is the challenge these players have had with appreciating the gross margin profiles of the targets.  Companies like Clorox and Church & Dwight, who have actively courted pet companies involved in sale processes, are used to product level gross margins that push 50%.  We have yet to see a lower middle market pet food company that could produce those types of margins.  Scale operators like Blue Buffalo generate 40% gross margins.  Further, this class of buyers is not used to employing meat based inputs and concerns about recalls have led them to prioritize companies with owned production assets, which as a class of sellers have been experiencing the highest market valuation multiples in the most recent M&A cycle.  Finally, we find consumer product companies, who are used to spending considerable dollars on consumer marketing, do not appreciate the role the pet specialty retailer plays in motivating product sales, and therefore they build into their valuation models a level of additional spend that makes them less competitive on price. Absent a notable cross-over success story, we don’t foresee these sentiments changing. In fact we have seen more companies in this class give up the ghost than take us the charge.

Finally, we have the conundrum of the natural food companies.  It would seem logical to assume this class of companies would be interested in the pet space given the current parallels between the human and animal nutrition markets.  With the proliferation of grain-free and natural pet solutions, these two markets have never been more closely aligned.  There have been several instances where natural food businesses have pursued pet food assets where they appeared poised to win, only to go home empty handed. The challenges here have been both quantitative and qualitative.  On the quantitative side, the inability to drive revenue synergies has made them less price competitive, even though deals at prevailing levels for the most attractive properties would have been accretive on an earnings basis (as an example Hain Celestial trades at 16.5x LTM EBITDA). Further, this class of buyers needs a scale property to justify the adjacent market entry to their investor base, which leaves them both limited properties to choose from and puts them in direct competition with the big three.  On the qualitative side, two issues have surfaced consistently.  First, these companies are being actively pursued by large strategic buyers themselves, which means focus is critical to driving shareholder value and remaining independent if that is what is perceived to be in the best interest of shareholders. Second, is the intellectual conundrum of adding meat to the portfolio mix.  Of note, the three largest natural food products companies — General Mills, WhiteWave Foods, and Hain Celestial — orient their market offerings around plant based nutrition.  Adding meat into that marketing narrative makes for a bit of a conundrum, even if they are comfortable with the food handling risk.  My view is the right property will enable these buyers to overcome those concerns.  The attractiveness of the profit margin profile of well managed animal protein based businesses, nearly 2x on an EBITDA margin basis at scale, will be sufficient to motivate a natural products buyer with some vision. I view it as only a matter of time before one of these companies takes this leap of faith, but there is certainly no clarity on when that might happen.  WhiteWave Foods and Boulder Brands, the two natural products companies who have come closest to the finish line now find themselves in very different circumstances.

While the above narrative may lead one to conclude the glass is half empty, as opposed to half full, it is actually an improvement on the historical paradigm. Five years ago we would not be mentioning the other classes of buyers as possibilities, let alone probabilities.  Today, I see it more as a matter of when, not if.


Note: 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.





mockingjayEarlier this month, Petco Animal Supplies and PetSmart stores in Topeka, Kansas, and adjacent Lawrence, Kansas, removed from their shelves Hill’s Science Diet and Ideal Balance products.  Store managers have been telling customers that the brands is not coming back on shelf.  Notably, Hill’s Pet Nutrition, a subsidiary of Colgate Palmolive, is headquartered in Topeka.

Consider the above action a shot across the bow in the dynamically evolving landscape of pet food retail.  To better understand the future, and what this gambit might mean, one must begin with a look at the past.

Hill’s Pet Nutrition was founded in 1907. The company started in the rendering business.  By 1930, the company had evolved into packing company, producing animal feed, dog food, and horsemeat for human consumption in Norway, Finland, and Sweden.  In 1948, Dr. Mark Morris contacted Hill’s seeking a producer for Canine k/d, his brand of healthy scientifically engineered pet food.  In 1968, Canine k/d was made available to veterinarians as Hill’s Science Diet.  The brand evolved into a broad line of prescription and breed specific solutions available through veterinarians and pet specialty retailers.  In 1978, Hill’s became part of the Colgate family through a merger of Hill’s parent company.  In 1999, Hill’s sales reached $1 billion.

What is particularly significant was the fact that Hill’s was at the forefront of the healthy pet food revolution, albeit with a scientific approach. Further, long before there was Blue Buffalo, Hill’s, along with Nutro, was one of the biggest drivers of customer traffic to pet specialty retailers on the market.  Thus, for Petco and PetSmart to declare war on Hill’s is, for lack of a better term, A BIG DEAL.

The makings of this feud can be traced back five years.  Beginning in 2011, Hill’s pet food sales began to stagnate.  The company, whose products evoked images of white lab coats and engineers, found itself on the wrong side of a change in consumer preference, and therefore purchase intent.  Instead of favoring science based nutrition solutions, pet owners began to favor products whose ingredient panels best mirrored their own diet.  White lab coats were replaced by images of roasted turkey, market vegetables, and whole grains.  Natural triumphed over engineered.

Hill’s, being part of a large consumer packaged goods firm, was not content to let its franchise slip away. The company tried to change with the market, launching Science Diet Nature’s Best, a naming convention approaching the absurd.  Not surprisingly the disconnect remained.  Hill’s responded with the launch of Ideal Balance, its “natural” solution, but was slow to win back customers. While Hill’s revenues had grown to $2.2 billion in 2015, this number represented essentially flat growth between 2011 – 2015.  To maintain sales, Hill’s embraced the internet as a channel.  In 2015, Hill’s represented 7.5% of online pet food sales, taking the third position behind Blue Buffalo (12.3%) and Wellness (9.0%).  It attained that position by turning a blind eye to the price discount pet food retailers where charging for its solution set, thereby drawing the ire of Petco and PetSmart.  And you understand why we-are-where-we-are.

One has to surmise that Hill’s knows quite well what it is doing and the consequences of its actions. My understanding is they have recently put pressure on major online retail sites to enforce their MAP policy based, in turn, on pressure from Petco and PetSmart. However, if Hill’s cannot get back in the good graces of its top premise based retailers, prepare to find Science Diet and Ideal Balance at big box store near you.  The likes of Target and Wal Mart would welcome Hill’s and its customer base with open arms. Whether this is a brilliant move by Colgate or the straw that breaks the brands back remains to be seen.

Of greater interest is what this means for Blue Buffalo.  A big box Hill’s is not going to be a welcome site for the veterinary community who drives the disproportionate sales of prescription diets and is a big influencer of Science Diet sales.  Blue Buffalo has staked the next leg of its growth stool on its veterinary line of products.  If Hill’s defects, that will create a fracture in the relationship between the company and the veterinary community that Blue Buffalo could be poised to exploit.  That’s not to say it won’t have fierce competition for that mind share from the likes of Royal Canin and Purina, but thirty days ago that market looked much tougher to crack.

Let the games begin.


Note: 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.




phoenisThe pet industry stands at the precipice of a tactical sea change.  The industry entered into this transitional phase in 2014 and is expected to remain there through 2017.  The industry entered into this state as a result of slowing growth and macroeconomic headwinds.  The historical catalysts for growth — Baby Boomers as the driver of industry spend, pet food upgrade cycle, premise based retail — have waned.  However, the future change drivers — pet ownership among Millennials, grain-free and alternative form factor pet food, ecommerce, connected pet — are individually not yet sufficient to resurface the landscape. Yet we expect, after another year of gestation, these trends, will set of the next phase of industry growth, market share shift, and strategic acquisitions.

As we muddle through the tail end of this transitional phased, here are trends we are keeping an eye on in 2016:

  • Industry Offers More Upside Opportunity than Downside Risk. Despite the slowing sequential growth rate for the industry and the limited innovation in consumables, we believe the industry stands poised to outperform in 2016. Our premise relies on three factors. First, the acceleration in pet adoptions experienced in the 2H2015 will have a knock-on effect on pet spending in 2016 as these new owners generate a full year of expenditures and trade up to premium solutions. This adoption spike is consistent with the 2012 – 2013 period where growth was 4.5%, albeit from a smaller base. Second, while the pet food upgrade cycle may be running on fumes, a proliferation in food additives, convenience offerings, and premium cat solutions will provide the industry with a growth impetus. Finally, we view the macro economic stability for employment, wage growth, and consumer sentiment as remaining favorable through the balance of 2016.
  • Expect Transaction Velocity to Remain High. 2015 was a return to normalized transaction velocity levels for the industry after a two year hiatus. We expect transaction velocity will remain high in 2016 as consolidation themes continue and sellers try to take advantage of the tail end of the capital markets cycle. What will change is the types of deals that are getting done. In 2014 and 2015, the industry was the subject of a large number of headline grabbing transactions involving key industry names – Big Heart Brands, PetSmart, Petco, MWI Veterinary Supply.  Absent a sale of Champion Petfoods, we expect most of the velocity to be among companies valued at less than $250 million. Notably, the M&A rumor mill was at peak decibel levels at Global Pet Expo. However, the number of companies pursuing deals pursuant to organized processes appears lower, meaning the number of potential deals that could get done pursuant to one-off dialogs is elevated.
  • Consumables Lines Blurring in New Ways. Five years ago, the thought of a pet treat business being able to bridge into pet food was unthinkable. Today there exist a myriad of treat brands which have developed a trusted connection with consumers in the pet specialty channel that might allow them to make that leap. Notably, several of these brands launched food solutions at Global Pet Expo to very favorable retailer response. While it is unclear if and how quickly these solutions can scale, it speaks to the fact that the delineation between food and treat brands continues to decrease.  As premium pet food companies find market share gains harder to come by, we expect they will seek to expand sales volume through increased treat offerings and acquisitions of treat companies. Further, treat company valuations will benefit from buyers factoring in potential product line extensions into food, though not all brands will benefit.
  • Ecommerce Landscape Changes Ahead. Sales of pet products continues to grow online fueled by price based competition and increased convenience. The impact of growing online sales can been seen acutely in the comps of Petco and PetSmart prior to their representative transactions. However, the pain has spread to the independent channel as well, as more brands have embraced ecommerce as a driver of growth and customer acquisition. In response, retailers are putting pressure on manufacturers to enforce MAP policies or, in some cases, choose sides. However, many of the brands caught in the battle among retail formats are not well equipped to do either. Assuming that continues to find fuel for its growth, and that continues to find brands willing to embrace its platform, this problem will grow. Pressuring brands will not solve the problem. Rather, the winners in retail will be those who deliver the best consumer service experience as measured by selection, price, and convenience. Independent retailers will need to develop capabilities that enable their customers to shop online and get accelerated delivery, presenting an opportunity for distributors to fill this void.


As always, a complete copy of our 2016 industry report is available by email.


Note: 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.


dwarfEarlier this week it was announced that Mars Petcare had acquired Whistle Labs, designer and marketer of activity monitoring and asset tracking solutions for small companion animals.  The deal was valued at $117 million (or $119 million depending on the source of information).  Whistle had raised $25 million in outside capital, including $21 million in two institutional rounds, including a $15 million Series B round in January 2015, led by Nokia Growth Partners.  The Series B also including participation from, among others,  Melo7 Tech Ventures (the equity fund of Carmelo Anthony, NBA superstar) and QueensBridge Venture Partner (the equity fund of Nasir Jones, world famous rapper).  The post-money on the Series B was reported to be $26.65 million, meaning these investors made a ~ 4.5x cash-on-cash return on the sale and triple digit internal rate of return based on the short duration.

When Whistle launched its solution set the market was bifurcated between activity monitoring and asset tracking.  The asset tracking side was being addressed largely by companies that were re-purposing technology that had been deployed in more traditional markets, such as logistics, automobile tracking, or human tracking (yes these do exist).  However, these companies did not necessarily recognize the emotional engagement aspects of the pet space, and did little to build community.  The network costs of these businesses were high, and the user base was small.  Given that the initial hardware purchase was subsidized, these businesses lost money, sometimes large amounts of it.  Further, there was no effective retail channel for this class of products as the major pet specialty retailers were not well situated to sell a $200 device with a monthly subscription attached thereto or explain the value proposition effectively to customers, and therefore the market was slow to emerge. Traditional channels, such as consumer electronics and mobile phone centers, were no more effective at attracting pet owners let alone articulating the purchase rationale.  It did not help that most of these solutions had large form factors and minimal visual appeal.

In contrast, Whistle brought to market an activity tracker with a high level of aesthetic appeal at a much lower cost.  Of significance, gone were the monthly subscriptions.  The problem was the market wanted asset tracking as the linkage between the activity monitor and the benefits use case was just not obvious to pet owners.  In short, there was data but not much to do with it and sharing it was cumbersome.  Much like the early human activity tracking sector, the real value of these devices did not emerge until the ecosystem and community aspect developed. Whistle would use part of its Series B financing to acquire Snaptracs, the Qualcomm based asset tracking solution that it spun out in 2013.  Using their industrial engineering acumen, Whistle combined the two solution sets into a best of breed offering and the business began to accelerate.

About the time of the Series B, Whistle began collaborating with Mars on the use cases of its device.  The challenge became how do you balance the venture capitalists agenda — drive brand, drive sales, drive community — with the Mars agenda around linking the data to wellness outcomes and product sales.  In the end, we believe Mars acquired Whistle to enable its agenda to become central to the future of the business.  Given that the lifetime value of a subscriber was high as the revenue was recurring, shareholder value increased exponentially.

While the acquisition and the prevailing purchase price will certainly give momentum to the connected pet space, the perceived rationale is somewhat vexing to rationalize.  Connected pet solutions that have been funded and launched into the market over the past few years have focused more on emotive connections (remote viewing, remote treating, automated feeding) than wellness outcomes, and here we have an acquisition rationale that we believe is tied more to healthcare outcomes than humanization. That is not to say the deal won’t be effective in catalyzing more investment and further M&A; the return profile will ensure that happens.

This deal very much validates the space, and we have been on record suggesting more large consolidators get into connected pet since 2013, when we marketed the Snaptracs business for sale.  We believe other large players will have to take notice and find avenues to take a position in connected pet. Further, we think the Mars acquisition rationale is specific to them and does not require a pivot by other operators to enhance their focus on wellness.  Mars is unique in that it is the only enterprise that has both veterinary hospitals and branded companion animal consumables, and therefore could view Whistle in a unique way and justify the purchase price as a result. It does help that they are a very large private enterprise and do not have to kowtow to outside shareholders.

One of the key themes we witnessed at the most recent Global Pet Expo was a proliferation of solutions aimed at connecting owners to their pets wherever they were resident at the time — the home, the grooming salon, the daycare or dog walker, the boarding facility. etc.  Expect the Whistle deal to give them all more conviction and attract a host of new entrants seeking to capitalize on the market opportunity. Ultimately, pet owners stand to benefit most.


Note: 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.



petcoWhen Petco Animal Supplies agreed to be acquired by CVC Capital Partners and the Canada Pension Plan Investment Board for $4.6 billion, the Dow Jones Industrial Average was trading around 17,800.  The market had recovered from the August swoon that turned out to be the worst month for the index in five years. Concerns about a slowdown in China, falling oil prices, and possible rate hikes by the Federal Reserve, sent the index into a tailspin.  Now, a mere 90 days removed from that correction, the Dow stood within three percent of its 2015 high water mark, and little concern was expressed about mega-deals, such as the Petco transaction, getting to close.  Press releases for the deal indicated a closing would happen in 1Q2016.

When the deal was announced, it was also disclosed that the transaction would be supported by $3 billion in acquisition financing, underwritten by Barclays, Citigroup, Royal Bank of Canada, Credit Suisse, Nomura, and Macquarie.  The broad lender support was a function of the company’s strong credit profile and a favorable following with investors after multiple recapitalizations, which is reflected in its trading profile in the secondary loan market.  Further, PetSmart’s acquisition debt had been trading a favorable rates in the secondary market, boosting interest. However, the deal was subject to syndication that would happen in 1Q2016.  While there has been no indication with any issues in closing the deal, there is cause for concern.  When the debt package was originally negotiated, the credits market were choppy,  now they are downright turbulent with bankruptcies accelerating and junk bond issuances declining by over 70% year-over-year.  While these bankruptcies are primarily related to the energy markets and energy dependent segments, they have put a malaise into the large cap buyout credit market as a whole.  Notably, in January, Citigroup tweaked the terms of Petco’s loan package to make it more attractive to potential syndication partners.

I proffer an example of the credit market’s uneasiness in the case of Mills Fleet Farm Group. In 2015, KKR agreed to buy the family owned retailer of rural consumer goods, including pet products, for $1.2 billion. Mills Fleet operates 35 stores in Minnesota, Wisconsin, Iowa and North Dakota.  The deal was set to close in late 2015, before it ran into trouble with its debt package. No sell-side capital markets deck was willing to take the paper, and KKR was forced to sell finance a large portion of the debt package against a backdrop of large retailer earnings misses, which drove up pricing.  The sale of Mills Fleet closed on Leap Day 2016, fitting.

While we may not be able to draw a direct correlation between Mills Fleet and Petco, the deals fall into the same buyout class.  Further, if you look outside of these transactions not many large cap LBOs are closing.  Most of the recent multi-billion deals have involved strategic acquirors.  Ultimately, we expect the Petco transaction to close, but there may be more bumps in the road along the way.


Note: 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.