In September 2008, a private equity group led by Hammond, Kennedy, Whitney & Company, Inc. (“HKW”),  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.  However, at the time, I put out some estimates here.

On December 9th, United Pet Group, Inc., a subsidiary of Spectrum Brand Holdings, Inc., announced they had acquired the business for $140 million.  Disclosed latest twelve months revenue for the company was  “at least” $40 million, putting the deal value at between 3.0x – 3.5x latest twelve months revenue — as eye-popping a multiple as we have seen in the pet industry, excluding food, over the past three years, and certainly something we expect other sellers and potential sellers to latch on to when establishing their valuation expectations.

When HKW and friends acquired the company, it was, in my opinion, a bit of a head-scratcher.   FURminator had established itself as the leading player in the deshedding tool market and its intellectual property position provided the company with a tangible source of competitive advantage.   However, it was not clear where the subsequent growth was going to come from.   How many $40 deshedding tools does one household need?  The product is virtually indestructible and the pet population was, at the time, not growing.   Notably, HKW did not have any pet industry experience and while my estimate of the value associated with the buyout transaction were, in hindsight, overstated, the group paid a healthy premium for the business.

So how did the buyout group generate such a handsome return?  Oddly enough, it was the recession.

While the pet industry fared well, on a relative basis, during the recession, the services segment was hit harder than consumables.  As consumers cut back on discretionary spending services were the first to go.   However, that did not mean that owners stopped washing and grooming their dogs.  Instead they just became do-it-yourselfers, driving sales of grooming products to the consumer market (relative to the professional market).  As the top brand in this space, FURminator benefited.

Additionally, the major pet retailers (Petco and PetSmart), in an effort to drive store traffic and control costs, began to consolidate vendors in late 2009.  During the 2007 – 2009 period, the number of product providers (both hardgoods and consumables) had increased markedly, reducing economies of scale in operations.  Further, brand proliferation made it difficult to provide consumers a uniform experience across store venues.  As central merchandizing groups took back control of the aisles, they shifted their product strategy to focus on core brands store brands/proprietary product.  As a result “tier two” players were waylaid.   After all, if you were only going to carry one brand of deshedding tool it was going to be FURminator.

The last leg of the stool was that the recession kicked off a wave of strategic M&A as corporations sought to purchase growth.   Within pet, the merchandising changes at Petco and PetSmart began to drive deals in the products space — Doskocil Manufacturing, Tagworks, Bamboo and Fat Cat, Spotless Group, among other deals.  United’s acquisition of FURminator is simply an extension of this trend.   These deals price attractively because of the operational synergies — rationalization of facilities, people, distribution.   Notably, United stated that once integrated the effective multiple they will be paying for FURminator is 6x – 7x EBITDA.  Given United’s ability to push the product into international distribution and their resources to assert  and defend FURminator’s intellectual property position means 3x revenue does not look overly expensive.

Beyond that, let’s hope the trend continues — 3x revenue valuations for everyone.

/bryan

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