August 2008


If you don’t have a pet, you likely know someone who does. While the economy may be experiencing a contraction, spending on pet related products and services is accelerating. The $41 billion industry is expected to grow by 12.5% annually for the next 2 years. The “humanization of pets” movement, as it is called, is big business and private capital has been part of the beneficiary food chain. Increasingly, we are hearing from investors an accelerating interest in investing in the pet space.

Pet food has been the historical proving ground for private equity in the pet space. Swander Pace Capital had previously experienced a favorable exit in selling Eagle Pack Pet Foods, Inc. in October 2007 to Berwind Corporation, owners of the Elmers franchise. Other notable deals include Teachers’ Private Capital (the direct private equity arm of the Ontario Teachers’ Pension Plan)/Doane Pet Care Enterprises Inc., which sold to Mars, Inc. for $840 million and Cypress Capita/Meow Mix Holdings, Inc., which sold to Del Monte Foods Co. for $705 million (~ 2.7 Revnue). Most recently Catterton Partners sold Wellness Pet Foods, Inc., a provider of natural pet food products whose brands include All Wellness and Old Mother Hubbard, to Berwind for ~ $400 million (~ 2.7x Revenue — theme anyone?). Catterton only bought Wellness in January 2004 for $45 million. That’s a handsome return in a short period of time.

The above is what I call Pet Food M&A v 1.0. The reality is that pet food is morphing in light of both input trends, food trends and consumer behavior. Organic pet food from Castor & Pollux and Newman’s Own, wet raw food from any number of purveyors, and dry raw from likes of Natura Pet Foods (my dogs are EVO consumers), The Honest Kitchen and Nature’s Variety and others, are new and interesting twists on the pet food equation. Given that raw is a $169 million sub-vertical and is expected to grow to $453 million 2012 (a 28% CAGR), I expect interest both from investors and consolidators to focus on organics and the raw niches. This will set the stage for Pet Food M&A v 2.0.

The first salvo in v2.0, was Highland Capital’s transaction with Castor & Pollux Pet Works of Portland Oregon. Not much is known about the deal or public. While Castor & Pollux appears in Highland Capitals portfolio list, there was no press release announcing the deal. If you were a CFO searching for a Portland position you might come across the salient details that Castor & Pollux “recently received a significant infusion of capital from Highland Capital Partners” in their on-line job posting ad. No matter. Given that Founding Partner Tom Stemberg is on the board of PETsMART, Inc. and Castor & Pollux is currently carried only in competing chain PetCo Animal Supplies, Inc. (where my dogs shop), there is some salient value Highland can likely add.

I suspect we are only in the first inning of v2.0. I also expect velocity for investment will pick up as the niches mature and investors become more aware of the trends in organic and raw food and that purchase multiples will exceed the long term trend of 2.7x due to the lower revenue base vs. franchise value of brands in this category. However, buyers will attempt to leverage their distribution frameworks to justify keeping multiples in check.

If you are a purveyor in this space with $5+ million in revenues, please call me. 🙂

/bryan


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I’m a banker, no not that kind of banker. An investment banker. I help others raise money to grow their businesses. I help business owners monetize their investment. Along the way, I’ve learned some things that might help you…without having to pay me.

I’m also a husband, dog dad (Greta (my angel) & Tyr (my devil)), a triathlete, Walla Walla wine collector, locavour, bike commuter and wanna be gardener. However, that’s not why we are here.

In my 10 years of investment banking experience I have had the opportunity to work with companies across the size and industry continuum. I have sold all or portions of Fortune 500 companies and raised Series A capital for start-ups. I have worked on Wall Street and in a boutique investment banking environment. Along the way, successes have been enjoyed and some mistakes made. Through it all some patterns have emerged that I can now share. Hopefully, these can be of benefit to anyone who reads this blog.

On “i’m not that kind of banker”, I will be blogging about my insights as an investment banker in the market. My focus will be on the consumer, food, specialty retail and business services arenas where I am passionate. At times I will blog about market conditions, finance theory, investment banking products and process. Other times I expect this blog will be about cool products, health and wellness, recruiting advice and, honestly, about my dogs. I intend this to be modular — take what you like, leave what you don’t, but enjoy it either way.

/bryan jaffe

All opinions expressed herein are my own.  They do not necessarily reflect the views of my employer, and shall have no recourse thereto.

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