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)