accross the pongI often talk about PetSmart and VCA Antech being proxies for the direction and health of the domestic pet market because of the transparency it provides us into consumer pet product and healthcare spend through quarterly earnings reports and third party equity research.  However, the U.S. market should not be viewed as a proxy for the global pet industry.  Absent the transparency we enjoy through publicly traded U.S. pet companies our view of global pet markets is tied to a reliance on third party data firms (Euromonitor, Mintel, etc.). While these firms produce excellent research, there is an inherent latency to their content, making it hard to measure real time performance.  A partial solution to that problem looks to be coming in the form of a public listing for the UKs largest pet retailer, Pets At Home, Ltd. (“PAH”).

Earlier this week PAH filed for an initial public offering on the London Stock Exchange.  The company plans to raise £275 million, giving PAH a valuation of around £1.5 billion. Thew company operates 369 retail stores, 246 small animal veterinary centers and 116 in-store grooming salons across Britain.  Estimates puts the company’s share of its home pet retail market at around 12%. The British market is highly fragmented, with PAH’s five largest competitors totaling just 225 stores combined. The company should have ample opportunity to grow both its retail base and veterinary services concept given these market dynamics. PAH plans to open an additional 131 stores, 400 veterinary clinics, and 200 grooming salons.  The company would be the only listed pet retailer in Europe.

PAH was acquired by a private equity consortium led by U.S. based Kohlberg Kravis Roberts & Co (“KKR”), which also owns Big Heart Brands, the Del Monte Foods pet products division, in January 2010 for £960 million.  At the time, the company had trailing twelve month revenues of £402 million and EBITDA of £70 million, resulting in an implied valuation of 2.4x Revenue and 13.6x EBITDA.  Bridgeport Equity, the seller, had acquired the business for £230 million in July 2004. Assuming a £1.5 billion enterprise value for PAH, it would imply that the value of the business has increased over 55% since being taken over by KKR and friends.

According to the recently announced listing, PAH had sales of £598 million for its year ending on March 28, 2013. The company said its revenue increased 11.7% for 40-week period ending on January 2, 2104.  Extrapolating this growth for the full year yields revenue of approximately £700 million, resulting in an implied valuation at listing of 2.14x Revenue. At the time of its listing PAH expects EBITDA of £110 million, resulting in an implied valuation of 13.6x EBITDA.  This would value PAH at multiples nearly two times those prevailing for U.S. leader PetSmart (1.0x Revenue and 7.3x EBITDA) despite the two companies having similar same-store-sales for the prior 12 month period.  While PAH has produced better topline growth over the past year versus PetSmart and enjoys a better profit margin profile due to its services revenue, this still amounts to a very healthy premium even after you account for the 17% decline in PetSmart’s stock since October 2013.

Whether PAH is overvalued or correctly valued is likely a debate with no end, the truth likely lies somewhere in the middle.  Either way, KKR has made a handsome return in a short period, even after you consider the company has reinvested over £100 million in growth initiatives.  However, the real value for those that follow the industry, will be increased data and transparency.  While PAH’s market capitalization will be approximately 37% of PetSmart’s, it should receive solid coverage from equity analysts with strong UK sales and trading networks.  That coverage will help us better pinpoint how the British pet market is performing, and ultimately enable us to draw parallels between a key foreign market and our own as well as the leading retailers in both geographies.

/bryan

Advertisements