Merrick Pet Care (“Merrick”), a portfolio company of Swander Pace Capital, announced that they had “acquired” (parens will be important later) Pet Appeal, Inc. (d/b/a Castor & Pollux Pet Works) (“C&P”).  Terms of the transaction were undisclosed.  For the C&P brand, and the pet owners that rely on their products, this should be welcome news.   The marriage of these two companies makes a tremendous amount of strategic sense and offers new life for the organic pet food sales and marketing company.

Merrick was acquired by Swander Pace in February 2011.  The company manufacturers and markets the Merrick 5-Star, Before Grain and Whole Earth Farms brands of dog and cat food.   Merrick products are marketed as “natural”, a segment of the pet food continuum that felt the impact of the recession but whose growth is expected to outpace the total industry over the next five years — 11% versus 4%, respectively according to Packaged Facts.

In addition to its capital, Swander Pace brought its experience in growing Eagle Pack Pet Food to the transaction.  Since the Merrick deal closed, the company has been hard at work reformulating itself from head-to-toe.   The “new Merrick” is due to launch in June 2012.  Think of it as trying to birth a U.S. version of Champion Pet Foods.  Merrick products will focus on sourcing ingredients from local and regional American farms and providing customers quality assurances through control of their supply chain.   I believe controlling your production is a differentiator that matters to the premium customer segment that is willing to pay more for their pet food.

When Merrick was sold the “anchor” of significance in its process was the excess production capacity at its owned manufacturing plant.  Merrick’s volume was modest but certainly not enough to justify having your own mint purpose-built facility in the “Helium Capital of the World”.  As such, Merrick has been out and about talking to pet food marketing companies looking for volume to drive production economies of scale.  The merger with C&P (the transaction was consummated as a stock swap with C&P’s founder and equity sponsors moving on to the combined board of directors)  solves that problem.

The merger of Merrick and C&Pis expected to be compelling.  In combination, the company can now offer all major sales channels multiple brands that bridge the natural and organic pet food spectrum.  Notably, C&P is the top selling brand in natural grocery, a channel where Merrick appears has no presence to the best of my knowledge.   Logic would suggest that Merrick will try and leverage C&P’s natural channel brand reputation to enter a second brand into the channel.  Additionally, C&P suffered from a poor margin profile due to the high cost of inputs and outsourced manufacturing burden.  As a result, the company was short on available dollars to drive SKU turns in major retailers through marketing and promotions.  Merrick’s manufacturing capabilities should provide some relief to that conundrum and gain the combined business economies of scale in purchasing, logistics and operations, freeing up dollars to drive demand.

While this transaction provides the C&P customer base with a lifeline, it also continues to beg the question — does the pet food customer care about organic, relative to natural, biologically appropriate, or other demonstrable statement of quality?  If so at what volume level does the traditional CPG pet food company also care about organic?  Notably, both C&P and Merrick where unable to attract the attention of major pet food consolidators at attractive prices, which returns us to the rule of them that you need $100 million in sales to be interesting to this constituency.   In combination you can see how the “new Merrick” has a chance to eclipse this threshold.  The unanswered question will be whether the formulations are differentiated enough to command a premium multiple at exit.   In the words of the famous 1980s band Asia — Only Time Will Tell.

/bryan

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