January 2011

2010 was expected to be a blowout year for liquidity transactions among privately held lower middle market companies.   A modest economic recovery coupled with a significant private equity capital overhang and looming capital gains changes gave many owners the belief that conditions were reasonable enough to warrant a dialog with buyers.

Through the first half of 2010, domestic mergers and acquisitions experienced a near 200% year-over-year increase and the market was on pace to reach levels not seen since 2000, according to Dealogic.   However, private equity deal volume (a significant sub-set of overall M&A and a barometer for the broader market) fell in the third quarter, according to the Pitchbook Platform, as fears related to changes in the tax code dissipated leaving us to wonder if the year had fizzled.  Based on fourth quarter Pitchbook data, private equity rebounded nicely, as 376 private equity deals closed, the second best quarter in the past two years.   For the full year, private equity transactions volume rose 9% relative to 2008; a modest but material improvement.  Based on announced strategic M&A, we expect those full year figures to also come out favorably when published.

As the calendar turned, transaction professionals began looking for signs as to how 2011 might break.  Based on January private equity data it looks as if we are off to a strong start.   Through the first three weeks of the year 114 private equity transactions totaling $8.35 billion closed, according to Pitchbook; the best start to the year since 2000.  The question that remains is whether this deal volume represents deals that missed year end deadlines or conditions are in fact that favorable for sellers.

From the pet industry perspective, 2011 is off to the best start on record.   Today’s announcement brings January-to-date figures to five major private equity/debt backed deals (buyer/target):

January 24, 2011 – WindPoint Partners / Petmate (terms not disclosed)

January 7, 211 – PNC Mezzanine Partners / Pet Partners ($21.5 million mezzanine debt financing)

January 7, 2011 – HIG Capital / Pro-Pet (terms not disclosed)

January 6, 2011 – MidOcean Partners / Freshpet (undisclosed equity investment)

Unannounced – Swander Pace Capital / Merrick Pet Care (terms not disclosed)

Notably, these transactions span a number of major segments of the pet industry — food (3), hard goods,  and veterinary care, the later of which had been rather dormant over the past 24 months.    Further, within food you have the gamut of contract manufacturing, branded, and raw/fresh.  Diversity, in my opinion, is a sign of health.

According to Pitchbook, 46 investors had completed transactions involving 44 companies in the pet industry since 2007.  They put 2010 transaction volume at a 11 transactions, relative to my count of 13 private equity backed deals (both of us exclude angle capital backed transactions).  If January is an indication of what is to come, I would estimate that 2011 could bring us 20 major industry deals sponsored by private equity backers.   However, with the announcement of the Petmate sale, the majority of the known backlog has been cleared.  Only a stronger economic recovery, coupled with a better valuation environment, could push us to those levels.   Undeterred, I expect private and growth equity firms to continue to scour the landscape for deals.

While little has been disclosed about the above deals, the Swander Pace / Merrick Pet Care transaction is notable.    It is my understanding that the transaction multiples associated with this deal represent a significant departure from the multiples associated with key transactions in the 2007 – 2008 timeframe.   Look for an article on this subject from me in the March issue of Petfood Industry Magazine.


(p.s. the picture at the top is the basic Newtonian Physics proof for velocity)


Despite a challenging economic backdrop, the pet industry was a star performer in the consumer economy in 2010.  With growth easily outpacing the broader economy, pet related companies were again the source of significant capital markets activity (both mergers and acquisitions and equity financings).

While the year will likely be best remembered for Procter & Gamble Co.’s acquisition of Natura Pet Products, it was only one of a significant handful of transactions that made headlines this year.   As I look forward to 2011, I expect to see a significant follow-on effect stemming from announced or closed transactions in the second half of 2010.  Further, as the broader economy continues toward recovery, deal velocity is expected to increase, especially in the pet space.  Notably, a number of meaningful pet transactions are known to be in process.

With the arrival of the new year, it is a natural time for us to take out our crystal ball and ruminate on what we see for the coming year.  As a long time follower of the pet industry, below are my predictions for the broader pet market in 2011.

  • Population Growth Returns.  After two years of stagnation, the pet population will return to growth in 2011.  During the recession, the pet industry grew as a result of food price inflation and the industry’s exposure to the premium consumer demographic.  With commodity prices in decline, forward growth will depend on population expansion.  While high levels of unemployment and low home ownership remain significant barriers, consumers will begin to add companion animals to their families as low cost food and health options become more widely available.
  • Premium Food Shake-Up Continues.   The impact of the Procter & Gamble / Natura deal will be felt in 2011.  I expect other major industry players to expand their portfolio to include ultra-premium and natural pet food properties in order to compete with a Natura portfolio that will likely move into the mass channel in 2011.  The most likely acquisition candidates include Blue Buffalo Company, Ltd., Merrick Pet Care, Inc., and Pet Guard, Inc., who have all been the source of sale speculation in the second half of 2010.  However, of concern are valuation expectations, which may dampen buyer interest.
  • Merchandising Changes at Mass.  PetSmart kicked off a new merchandising strategy in the second half of 2010.  The major pet retailer announced partnerships with Martha Stewart, GNC Corporation, and Fisher-Price, Inc., in an effort to attract store traffic and garner higher margin.  This strategy marks the return of centralized control over store direction that was widely dispersed prior to the recession.  I expect this strategy to be successful, and other mass channel pet retailers to seek their own partnerships in 2011 in an effort to compete with PetSmart’s first mover advantage.
  • Regulatory Pressures Increase.  The pet industry has enjoyed a long and relatively unimpeded run with respect to regulation.   While natural pet foods and supplements are regulated by the Food and Drug Administration (FDA)’s Center for Veterinary Medicine, consumers are not finding this sufficient to meet their needs.  As legislators move from focusing on the domestic economy to the tactical needs of their constituencies in 2011, I anticipate the pet industry will see increasing regulatory scrutiny with respect to product claims and supply chain management.
  • A Public Pet Platform.  The pet industry is undergoing a wave of consolidation across core market segments.   However, the industry lacks pure play public buyers given the size of the industry domestically.   The majority of public pet companies tapped the market in the mid-1990s, with PetMed Express, Inc. (d/b/a 1-800 PetMeds) the last in March 2000.  I expect this drought will end in 2011, with at least one major private pet company to enter the public markets.  My prediction is to see one of the major hardgoods companies to be the first to go.
  • Increasing Deal Velocity.  With over $400 billion in un-invested capital in the hands of institutional investors, I expect that transaction velocity will pick up across industries.  However, I expect the pet industry to garner more than its fair share.  During 2010, I witnessed an increased focus by consumer oriented growth equity and buyout funds in the pet industry.  I also saw major pet industry buyers become increasingly active. As valuations improve over the course of 2011, correlated with debt becoming more widely available, I expect to see capital markets and M&A transactions in the pet industry increase, potentially significantly, as owners seek liquidity and brands seek to capitalize on available market opportunity.