The private equity community has taken a modest fascination to the pet industry over the past five years.  While investment in the pet industry is nothing new – Thomas H. Lee Partners acquired PETCO Animal Supplies, Inc. in 1988 – interest accelerated markedly in since 2007.  According to the Pitchbook Platform, 46 investors had completed investments in 44 pet related companies over the past five years.  Further, pet industry deal volume grew from 2009 – 2010, from seven to 11 deals, in contrast to the broader consumer marketplace which contracted.  From a transaction volume standpoint, 2011 is off to a strong start for the pet industry with five announced deals in January to-date.

Pet food and treats have been the source of a large percentage of this transaction volume.  Given the growth in the pet population and the percentage of owner spend target towards consumables, it was relatively easy to see why these properties would experience tangible growth.  Further, the proliferation in channels where pet food and treats are sold coupled with the increased willingness of consumers to spend on premium pet food have pushed the category to impressive heights.   The net result was there were nine major pet food investments/acquisitions in the 2007 – 2011 timeframe.

Of the major acquisitions and investments the two most talked about transactions took place prior to the recession.  In October 2007, Swander Pace Capital, a California based consumer oriented private equity firm, sold Eagle Pack Pet Foods, Inc. for an undisclosed amount to Berwind Corporation.  Swander Pace made its initial investment in Eagle Pack in 2004.   Monies were used to drive sales and marketing and to acquire additional talent into the business.  In August 2008, Berwind followed up its Eagle Pack acquisition by purchasing Old Mother Hubbard, Inc. for $400 million from Catterton Partners, a Connecticut based consumer oriented private equity firm.  Like Swander Pace, Catterton had made its initial investment in Old Mother Hubbard in 2004, to drive sales and marketing, investing $45 million for an undisclosed ownership percentage.   Berwind went on to combine the two brands to form WellPet, LLC, which is an active consolidator in the pet food/treat space today.

Little was publicly disclosed regarding the transaction multiples associated with the buys outlined above.  However, general consensus was these transactions took place in the range of 2.5x – 3.0x latest twelve months revenue.  The relevance of those multiples was established a year earlier by Del Monte Foods Co. in its acquisitions of The Meow Mix Company, LLC (3.7x latest twelve months revenue) and Kraft Foods Inc., Milk Bone Dog Food Business (3.2x latest twelve months sales).  Subsequent pet food/treat deals have all involved a comparison to this multiple set and collectively they have formed the basis for seller expectations thereafter.   Notably these multiples are consistent with branded consumer goods companies during the same period.

While seller expectations in the pet food/treat space have remained anchored in the past, the general transaction market has undergone significant turmoil.   A collapse of the debt market rendered private equity dormant for much of 2009 – 2010, with market activity bottoming in 2Q2009 and only modestly recovering over the next 18 months.  Without private equity as a foil, public company buyers felt less challenged to pay a premium for attractive properties, and valuation multiples contracted.  The net result is a number of pet food/treat deals have died over the anchoring on these historical multiples.  In short sellers’ expectations have not changed with the times, in part due to the belief that the pet industry holds a sacred place in the consumer transaction landscape, a notion that has received considerable validation.

According to the Swander Pace website, the private equity fund recently closed on a new pet food platform acquisition, acquiring Merrick Pet Care, Inc., a manufacturer and marketer of wet and dry dog and cat food under the Merrick, Before Grain and Whole Earth Farms brands.  While there has been no deal announcement to date (one does not appear imminent consistent with the Monitor Clipper/Highland Capital Partners/Castor & Pollux transaction of 2008) and transaction value and associated multiples have not been disclosed, the data points we are hearing, validated by several sources, point to a significant contraction relative to the multiples above.   My opinion is that the sale of Merrick Pet Care will mark a meaningful bifurcation in pet food/treat transaction multiples.  This parsing of the market is just what private equity has been hoping for in order to unlock transaction volume in the pet industry.

The above is not to say that premium multiples for pet companies are no longer available.  In fact, there is ample evidence, based on the Natura Pet Products, Inc. and Waggin’ Train, LLC transactions, that the 2006 – 2008 data set remains relevant, but no longer are we looking at a one size fits all world in pet food/treats.  Rather, premium multiples will be reserved for deals with characteristics common to premium deals in other consumer markets – brand awareness and value, operating leverage and economies of scale, defensible intellectual property, and proven management.  Large multi-brand properties that command significant shelf space across multiple sales channels will be the beneficiary of these valuations.

From time-to-time I expect emerging companies with truly innovative products and defensible market positions in the pet industry to command premium multiples, even in excess of those outlined above.   Companies that meet this criterion will (a) have products that can be sold across the pet channel spectrum, in general mass, and in specialty retail environments, (b) meet an emerging need that is not well addressed by existing alternatives, rather than being a new twist on an existing formula, (c) solve a long term structural industry problem that impacts cash flow, and (d) be lead by management teams with proven industry experience.   However, for all intents and purposes, the axis of the pet transaction world was effectively bent by the Swander Pace/Merrick Pet Care transaction, and possibly for the better of total transaction volume.