For those of you who turn into my blog when there is a pet headline attached, you will note that “the well” has been a little dry lately.  It’s not that there haven’t been things to talk about, rather there hasn’t been interesting things to talk about.  As I walked around SuperZoo this past week, many of you made it known to me that you were a little disappointed.  Then a little package was sent to all of us this morning in the form of the announcement that Perrigo Company (“Perrigo”) has agreed to acquire the assets of Sergeant’s Pet Care Products, Inc. (“Sergeant’s” or the “Company”) in a deal valued at $285 million, or approximately 2.0x fiscal 2012 revenue (Sergeant’s fiscal year end is September 30, 2012) and approximately 10.0x EBITDA (this is an informed SWAG, if such a thing exists).  Finally, one the industries big names has traded.  Whenever an industry leader transacts, it is good for the market providing guidance on current valuations and changing the competitive dynamic, both of which promote investment and renewal.

For those of you who have not followed the Sergeant’s story closely, the 140 year old Company was originally acquired by Sowell & Company (“Sowell”), a Dallas based private equity firm in 2000.  This was Sowell’s third acquisition in the pet supplies space.  Under Sowell’s ownership, the Company grew the topline over 5x, and profits by an even greater factor.   Along the way, Sergeant’s made a number of acquisitions, including the Consumer Brands Division of Virbac SA, the French animal health concern.  The Company’s solution set address approximately $8 billion of the $50+ billion pet industry.

What is most interesting about the Company’s historical situation is that it was not sold sooner.   Sowell’s ownership term was 12 years, significantly longer than the typical 3 – 5 year private equity holding period.  However, Sowell is not your typical private equity firm.  Because it does not source its capital from third parties (the money comes from the personal fortune of Jim Sowell, a Texas real estate magnate, and one of Top 100 Most Powerful People in Dallas/Fort Worth), Sowell can exercise patience and time the market.   As an example, Sowell was able to wait out an EPA investigation into spot-on flea and tick treatments in 2009 – 2010, as opposed to going to market under a cloud of uncertainty.  Sergeant’s derives over 75% of its revenue from flea and tick and health and wellness solutions for companion animals.

Also of interest is who bought the Company.  After a broad private equity and strategic sale process, Perrigo stepped up to acquire the assets, leaving behind (we assume) any contingent legal liabilities.  The courtship took over 12 months.  Perrigo is a developer, manufacture, and distributor of over-the-counter and generic prescription pharmaceuticals, infant formulas, nutritional products, and active pharmaceutical ingredients worldwide.  While the company is highly acquisitive, having done 15 deals since 2008, this is its first foray into the pet space.  The deal gets Perrigo a solution set that it can extend into its store brand product development process.  The company expects to take the Sergeant’s formulations into a wider distribution framework on a private label basis, mainly in drug retailers and the mass channel.   In short, this deal is about revenue synergy and barriers to entry, as opposed to cost and industry consolidation.

What is of equal interest is why The Hartz Mountain Company (“Hartz”) or Merial Animal Health (“Merial”) did not step up to the plate.  Rumors have it that Hartz is struggling under Uni-Charm Corp’s ownership but the chance to take out a competitor  would, on its face ,seem appealing.  Merial, whose parent company is holding over $6+ billion in cash, could have greatly enhanced their presence in the U.S. OTC market through the deal as well.

One also has to view this transaction as an opportunity for smaller pet companies in Sergeant’s secondary categories — grooming, toys, consumables — to take shelf space.  Nothing in the post deal PR hub-bub was there any mention of an emphasis on the other 25% of the portfolio.

Finally, one has to wonder whether this deal is a prelude to other major transactions in the space.  Blue Buffalo, Natural Balance, are you listening?

/bryan

Advertisements