On September 18th, 2008, Hammond, Kennedy, Whitney & Company, Inc. (HWK) a private equity firm, headquartered in Indianapolis, specializing in leveraged buyouts of privately owned businesses,  and Cardinal Equity Partners (Cardinal),  of pretty much the same ilk, acquired a majority interest in FURminator, Inc., a Fenton, Missouri based manufacturer and marketer of pet grooming products.  The FURminator’s products include small, medium, large, cat, and equine deshedding tools, shampoos and conditioners, treats, and dog food supplements. Terms of the deal were not disclosed.

FURminator was founded in 2002, by Anglea and David Porter, a husband and wife team.  Angela, or Angie as she is referred to on the company website, a professional groomer, and owner of Groomingdales’s, an upscale pet salon in south St. Louis, identified the need for a next generation deshedding and David (Top Dog by title) helped her run with the idea.  In 2004, the company generated sales of $700,000, which grew to $25.3 million in 2007.  Sales are projected to top $35 million in 2008.  FURminator ranked the highest among the top 50 St. Louis companies that made Inc. magazine’s list of the nation’s 5,000 fastest-growing private companies (see list here).

The FURminator product line was launched into the professional channel — groomers, veterinary offices, pet retail.  The price point was +/- $40.  The company was soon able to garner placement on QVC, creationg national awareness in a short period of time, and was then picked up by national retailers.  FURminator deShedding tools and products are available at national pet retails such as PetSmart and Petco, and at independent pet retailers, veterinarians, groomers and rescue organizations nationally.  Leveraging their brand in grooming products, the company has successful expanded into shampoos, treats and supplements.

The company was boot strapped by the founders since inception, financing growth with bankroll from David’s marketing day job and Groomingdale’s profits.  The company moved early to protect its intellectual property by patenting the product design.  Currently the company has four patents.

Hammond, Kennedy, Whitney & Company, Inc. was founded in 1903 by Paul Hammond as a merchant bank for wealthy families.  Since that date, it has evolved to be a generalist private equity firm focusing on the lower end of the middle market.  As a general rule their investments come with low risk of technological obsolescence. HKW focuses on management buy-outs of companies which have revenues between $20  – $200 million, EBITDA between $2 – $20 million, and enterprise values between $10 – $150 million.  The FURminator represents a departure for HWK in that it is their first investment in the pet space and it is much more consumer oriented than their previous investments, though they do list consumer discretionary as a focus area.

If I drew up a sketch of Cardinal, it would be much the same, only smaller, with slightly more exposure to the discretionary consumer market.

This deal interests me along many levels.  First, it is a pet deal and I follow the space.  Second, is that it’s a majority recapitalization.  A majority recapitalization involves purchasing more than 50% of the equity of the company, but more often 75% – 80%.  Given the decline in the credit environment we haven’t seen many of those lately, and as someone who is currently representing parties in those types of deals, I know how hard they can be to get done in today’s environment.  While financial terms were not disclosed insider knowledge (not mine, see source here),  says that the deal was north of $80 million and that HWK and Cardinal put up approximately $50 million with the balance coming from bank debt and a few smaller individual investors.  My gut (me now making up numbers) tells me that the deal likely penciled out at 3.0x TTM (trailing twelve months) sales, or ~ $90 million in enterprise value (that’s debt plus equity).  Assuming the company had a 35% – 40% EBITDA margins on $30ish million of TTM sales at the time of the deal that would imply they were able to garner 2.5x – 3.0x leverage, which in today’s environment is a solid out outcome.  I admit the potential to be underestimating their margin profile. In tighter economic times, debt capacity notwithstanding, I’ve found investors hesitant to provide such large cash outs to founders assuming they will be disincentivised to work for the larger payout.  One of the ways that I suspect this was overcome was the regional proximity of the key players — St. Louis and Indianapolis.  The physical proximity makes it easier to monitor the deal.  Finally, I’m interested in the deal because FURminator used a banker, The Fortune Group out of St. Louis.  What is unknown to me is whether FURminator was responding to inbound interest or running a process.  I’m guessing it was the former.

So why would investors pay such a healthy price for FURminator.   I’m hoping to talk to HWK to confirm, but I can devise a pretty solid rationale.  First, despite the gloom and doom in consumer discretionary, the pet vertical continues to perform and has a solid forward outlook.  The market is large and growing double digits.  Second, in a contracting consumer environment, people view grooming services as a place to cut back (ranked 3rd, 68% in a Fleishman-Hillard survey) and in fact grooming services at chain retail are leveling off as an expenditure.  In tough economic times we become a do-it-yourself society, in contrast to a do-it-for-me populous.  This bodes well for FURminator sales.  Lastly, I suspect there is an international angle to be accelerated.

I can already read the headline when they sell, “Private Equity Firms Shed FURminator”. Maybe I will get to play a role.