m&a


The evolutionary cycle that is currently gripping the pet industry is now on full display, impacting all segments and all market participant. The market is no longer benefiting from historical growth drivers as new influences overrun incumbent paradigm. Notably, pet food prices have experienced deflation throughout 2017, and this pattern is projected to continue.

The differentiation and uniqueness in the pet industry’s operational model is rapidly eroding.  The industry is beginning to parallel its human corollary, changing the nature of competition and anointing new winners.  Barriers to product availability have eroded and the consumer behavior patterns resident in the human food and healthcare markets are increasingly exhibiting themselves within the pet industry

The challenge for market participants is that the current phase of competition is not programmatic in nature. The strategies that parties have historically relied upon to compete are unlikely to serve as effective guideposts for future strategic decision-making.  Market participants should brace for higher levels of volatility

This fact pattern will present the best-positioned companies with an opportunity to create outsized value. Capital will flow into companies best-positioned to take advantage of new ownership paradigm and evolving channel preferences of pet owners at pre-money valuations that better resemble technology multiples. Acquisition multiples for market leaders will expand as companies will be “bought” more often than sold. Buyers are more likely to view assets differently, due to the tendency for strategies to diverge in periods of uncertainty, reducing potential competition for deals

However, increased risk associated with the current operational paradigm will also drive a flight to quality and elongate deal cycles due to increased scrutiny. When multiples are elevated, marginals deals are more likely to fail due to associated risk discounts.  We expect buyers to search for companies with meaningful barriers to replication – brand, intellectual property, access to alternative sales channels, or proprietary products.

Against this backdrop there were four theme that caught our attention in 2017 (click through to view content):

  1. Services are increasingly driving the growth of the pet industry.

Slide0

2. As anticipated, Blue Buffalo launched into FDM.

Slide1

3. Digital distribution is accelerating and changing the competitive landscape.

Slide2

4. Supply chain integrity/sourcing are becoming a meaningful form of differentiation.

Slide3

In short, we are living in interesting time.

For a full copy of the report contact me directly.

/bryan

Note: This blog is for informational purposes only. The opinions expressed reflect my view as of the publishing date, which are subject to change. While this post utilizes data sources I consider reliable, I cannot guarantee the accuracy of any third party cited herein.

 

Advertisements

m8bA common refrain in the pet industry is that to predict the future of the consumables category, you need only to look back on the prevailing human trends three years prior. Today, I would argue that this rule-of-thumb applies more broadly, to a cross section of pet industry categories, than previously appreciated. As an example, the rise of ecommerce in the pet industry follows a similar trajectory to a number of human categories that were thought to be “Amazon proof”.  This is why I think pet industry participants should be paying attention to recent funding deals for Freshly, Inc., whose $77 million Series D was led by Nestle, USA, and Chef’d, LLC, whose $17.6 million Series B was led by Campbell Soup Company.

Both Freshly and Chef’d are in the business of delivering fresh food to your door step.  In the case of Freshly, these are fresh prepared meals, which require minimal intervention to get them from the packaging to the plate.  Chef’d delivers personalized meal-kits, which you then prepare at home, in as little as 10 minutes.  As a side note, I’ve never completed a meal kit from any company in under an hour, but maybe that says more about my cooking skills than anything else. Notably Chef’d partners with culinary and media personalities to create menu inspirations.  That said, what these companies deliver is less interesting than who is financing the growth of their business.

Large human food companies have significantly increased their investment activity in emerging food brands over the past 24 months.  Major industry players have set up dedicated investing units to source and evaluate opportunities.  The human food industry has largely outsourced its research and development function to start-ups who are seeking to capitalize on emerging consumer trends.  These companies become investment or acquisition targets if their solution set demonstrates the ability to resonate with a large enough audience and if their production processes can scale.  However, this pattern has, to-date, largely been confined to product companies.  Freshly and Chef’d are direct-to-consumer distribution companies cloaked in a product orientation.

The pet industry has its Freshly and Chef’d corollaries.  Companies like JustFoodForDogs and The Farmer’s Dog, have both recently received major cash infusions from financial players.  There are numerous others competing for this emerging space — Ollie Pet, NomNomNow, PetPlate, to name a few.  Yet, I believe the investment trend illustrated by the Freshly and Chef’d transactions tells us more about the real value of scale direct-to-consumer businesses such as A Place for Rover and Bark & Co., than the potential for fresh food delivery in the pet category, whose future we also think is bright.

What the pet food and products manufacturers have in common with their human counterparts is their core means of distribution are under siege by small retailers who provide better service and/or in-store experience as well as by the internet.  As such, any opportunity to get directly to the end customer is highly coveted, and therefore of great value. Within the pet category, there are a very limited set of players that have proven their ability to directly access a critical mass of pet owners.  Therefore, as large manufacturers look for direct-to-consumer exposure they will be left with a choice of ascribing a very high value to an asset with breadth or taking a calculated risk on an upstart.

What these large strategics are looking for is the ability to build a relationship directly with a consumer that is tied solely to the product or offering, and that exists outside of that buyer’s relationship with any retailer, physical or digital. If they own the customer they can look to monetize him or her in a variety of ways, capturing more the the margin along the way. We believe this trend to be applicable to both product and service providers in the pet category.

The question then becomes what would a tie-up between a Mars/Purina/J.M. Smucker Company and a Rover/Bark & Co. mean for the acquired entity.  Would consumers have the same affinity for their Bark Box if it only included treats from the buyer organization, or is the lack of affiliation that part of the value proposition?  We don’t know the answer to that question, but if we follow the story of Freshly and Chef’d going forward, we may well find out.

/bryan

Note: This blog is for informational purposes only. The opinions expressed reflect my view as of the publishing date, which are subject to change. While this post utilizes data sources I consider reliable, I cannot guarantee the accuracy of any third party cited herein.

 

dylan“The times they are a-changin” – Bob Dylan

Industry analysis is easy when everything is moving up and to the right.  When market conditions are such that a rising tide does not float all boats, it is harder to draw conclusions that are applicable to a broad set of market participants.  The pet industry now finds itself in an operating environment where company execution will most likely determine the winners in this phase of the cycle.

The  pet industry has hit a transformative moment.  The humanization movement, though it continues to be cited regularly, has achieved its point of arrival — pets are treated like members of the family.  Kids today only know of pets as their equal.  As a result, there are no longer large cohorts of pet owners who are available to upgrade.  At the same time, younger generations now represent the largest segment of pet owners, and they think and act differently than their parents generations.  However, they also lack the same disposable financial resources, meaning they have to make tradeoffs today.

These realities are changing the power paradigm in the category.  The pet consumer is in the ascendancy at the expense of all others who participate in the supply chain.  Today the pet owner is able to choose among channels and brands based in their personal values.  Effectively product access has been commoditized. Consumers are now able to dictate to manufacturers what attributes they seek, not vice-versa.  In the future this paradigm will move across the sub-categories within in pets to redefine who wins and who gets left behind.

When market dynamics shift with significant force, it usually leads to elevated levels of industry consolidation. The 2015 – 2016 period was the greatest period of consolidation the industry has witnessed, and we expect that will continue.  With that as a backdrop, we present our pet industry capital market themes for the Spring of 2017:

  • Major Pet Specialty Franchises Struggling. It was not long ago that PetSmart and Petco could do no wrong. The major pet specialty chains were posting SSS comps that were the envy of retail analysts; the gap between the two biggest pet retailers and the balance of the industry seemed vast and unbridgeable. How quickly things can change. Over the past three years, major pet specialty has watched its franchise erode. Independent pet retailers out-serviced them; FDM retailers poached manufacturers and offered customers a better cost value proposition; and ecommerce providers out-priced and out-“convenienced” them. In 2016, we estimate that PetSmart comped down 3% – 4% (mature stores) and that Petco comps were flat to down 2% (mature stores). With their loan packages trading below par, both companies are under pressure to innovate. Petco’s turnaround strategy appears focused on private label and house brands.  PetSmart is focusing on ecommerce, as evidenced by its acquisition of Chewy. What is clear is that there is no silver bullet for what ails them. Expect things to get worse, before they get better as brands begin to feel pressure to find other sources of growth and as Petco and PetSmart refine their respective strategies.
  • Treat Acquisitions are Focused on Sustainable Competitive Advantage. The treat space has been actively consolidating as manufacturers compete for the discretionary portion of the pet owner’s shopping basket. However, what is rapidly changing is the attributes these consolidators are seeking in their acquisition targets. Deep customer relationships built through an emotive brand are now the table stakes.  Buyers want some form of competitive advantage that has greater barriers to justify prevailing multiples. The acquisition of Salix Animal Health (Spectrum Brands) and Whimzees (WellPet) are examples of this in practice. Other major pet treat IP players, including Petmatrix, are most likely to get snapped up by the large industry players. This will in turn create an opportunity for private equity to acquire mid-stage brands and invest in building these attributes.  The phrase “innovate or perish” has never been truer than in the treat space today.
  • Digital Pet Age Has Arrived. Historically, pet industry incumbents have been dismissive of the potential for category disruption through technology innovation. Major pet retailers were not well situated to sell the solution set; legacy pet ownership generations, the Baby Boomers, did not understand it; market leaders were not organized to innovate into the category. As a result, Chewy, A Place for Rover, Bark Box, Whistle, and their peers rose up to fill the market void, creating substantial shareholder value as pet ownership dynamics shifted to favor the digital generations. In 2016, $154 million dollars was invested in 46 pet-tech deals, a pace that has been increasing since 2012. Even in its nascency the pet tech movement is showing signs of making a lasting impact. As Millennials further outpace Baby Boomers in terms of pet ownership, digital will gain more momentum in the pet category. This realization will leave strategic buyers who have not made a tech play scrambling to play catch-up.  This trend augers well for acquisition valuations in this sector of the market.
  • Expect M&A Transaction Velocity to Remain High. Since 2014, transaction bias in the pet industry has been towards M&A. 2015 – 2016 was the greatest period of industry consolidation as measured by transaction volume. As company’s reposition themselves to compete in a rapidly changing landscape, we expect elevated M&A activity to continue in 2017. Market leaders will seek to plug remaining portfolio gaps while small and midsized players will be looking to exit at the tail end of the cycle. While acquisitions may be plentiful, there will also be a flight to quality with differentiated assets – brand, scale, channel (direct or proprietary) – garnering premium valuations, while those lacking it face commodity multiples. If the U.S. implements tax reform, volume should spike across asset classes providing private equity a unique opportunity to buy into the category.  Financial buyers will be banking on these assets to carry them through the next recession.

As always, our full pet industry report is available by request.

/bryan

Note: This blog is for informational purposes only. The opinions expressed reflect my view as of the publishing date, which are subject to change. While this post utilizes data sources I consider reliable, I cannot guarantee the accuracy of any third party cited herein.

sbmIf you have not seen the digital age in pet coming, it’s arrival has now been fully announced.  In the past year, a remarkable number of meaningful events have happened to punctuate it’s arrival.  Many of those events were likely to have gone unnoticed at the time, but in aggregate its hard to ignore.  Notably the past last year was book-ended on one end by Mars acquisition of Whistle Labs (March 31, 2016) and the merger of A Place for Rover and Dog Vacay (March 29, 2017) on the other end.  In between we have witnessed the rise of Chewy.com at the expense of Petco, PetSmart, and even Amazon; Phillips Feed Services acquisition of Petflow for the purpose of arming independent retailers for the digital pet race; and a total $154 million dollars invested in 46 pet-tech deals.

Pet-Tech-Annualnew

Historically, it has been easy to dismiss the digital pet movement as a novelty act, confined to products whose addressable market was small and whose value proposition was narrow.  It’s true that many of the first generation products were poorly designed or over engineered, and generally expensive.  Further, the arrival of pet tech was slowed by the inability of core pet retailers to sell the solution set.  Simply stated, Petco and PetSmart were not well set up to educate consumers on why they needed to own a $200 smart feeder or a $150 remote treating system.  Further, technology retailers, such as Best Buy, knew very little about the category and were therefore unable to effectively merchandise a pet technology set.

Despite these impediments, it’s hard to argue with the results of the market leaders.  Whistle Labs was acquired by Mars for $117 million, representing a high single digit multiple of revenue.  As we detailed in our last post, Chewy.com has achieved over 50% market share in online sales and anticipates 2017 sales of $1.5 billion. Finally, A Place for Rover (Rover.com) was valued at more then $308 million its $40 million Series E financing closed in October 2016.  Rover also announced that it acquired its primary domestic competitor Dog Vacay in a stock-for-stock transaction. In our discussion with other pet technology companies many of them appear poised to deliver strong growth and financial results in 2017.

The collective impact of these digital pet companies and their ascendancy in terms of industry importance can no longer be ignored.  While the negative comps produced by both Petco and PetSmart in 2016, and the recent deterioration of their leveraged loan valuations, can be attributed to a variety of factors, it’s hard to argue that the rise of Chewy.com and the lack of traffic drivers attractive to the Millennials, and subsequent generations, such as pet technology products, has been a key contributor.  The fact that the vast majority of pet food brands are available online, making their availability more commoditized, and not an influencer of store visits, is exacerbating the problem.  Further, Rover and DogVacay have served to disrupt the discretionary services segment of the market, for whom Petco and PetSmart (both boarding and grooming), along with VCA Antech (boarding) and Banfield Animal Health (boarding),  are the most established players.  Prior to the take private, PetSmart generated $750+ million in services revenue annually, accounting for ~ 12% of revenues.

The ability of incumbent players to catch-up digitally is limited.  Earnings based companies are hesitant to acquire companies without an established track record of profitability given their valuation paradigms consist of multiples of EBITDA or contribution margin.  Mars benefited from its private nature when considering the acquisition of Whistle.   A subset of major players we have spoken to are waiting around for these companies to stumble in hopes of acquiring them at bargain prices.  While companies like Chewy.com have “scraped paint” in the past, we see this strategy as unlikely to succeed in the near to medium term.  Those who are called to action, but partially paralyzed by their valuation paradigms will seek to partner.  Whether creating these bridges will be enough to move the needle or insulate them from risk remains to be seen.

/bryan

Note: This blog is for informational purposes only. The opinions expressed reflect my view as of the publishing date, which are subject to change. While this post utilizes data sources I consider reliable, I cannot guarantee the accuracy of any third party cited herein.

 

asiaOn January 9, 2017, Mars, Inc., owner of the Banfield Pet Hospital veterinary group, the largest pet hospital chain in the nation (~900 units), agreed to acquire VCA, Inc., the markets number two player (~760 units), in a deal valued at $9.1 billion.  The deal represents a 31% premium to the prevailing stock price, just prior to the transaction, and reflects an acquisition multiple of just over 19.0x LTM EBITDA, generally in line with other top tier animal health company acquisitions (15.0x – 20.0x).

VCA’s equity had experienced strong appreciation in the year leading up to the transaction, rising ~32%.  The company was enjoying renewed momentum in its hospital business in 2016 with comps growing 6.3% in 2Q2016 after posting a gain of 7.6% in 1Q.  However, 3Q2016 comp growth of 5.4% was viewed as a sign of deceleration against a back drop of a $0.02 EPS miss. The company’s equity had rebounded to near peak levels before the transaction was announced.

As part of the announcement, Mars indicated that VCA would continue to be led by Bob Antin and will operate as a separate business unit. Antin holds a 3.12% equity stake in VCA, which is valued at ~$240 million in the transaction.  It is our expectation that the two hospital chains will be merged at some point to realize the clear operating synergies between the organizations.  Antitrust is not the reason the businesses are expected to be kept separate in the near term.  There are approximately 26,000 pet hospitals in the U.S. and Banfield and VCA operate under different service models.

The business logic of the deal is hard to question.  Key reasons for the acquisition include the following:

  • Economies of Scope. While VCA and Banfield operate under different service models, they are vying for the same customer.  By owning the two biggest banners in the space, Mars can begin strategically thinking about how to rationalize current and future locations to maximize performance within its portfolio.  The data available to them for strategic planning purposes alone should be invaluable. The combined expertise should enable Mars to bring the highest quality of animal care to the largest addressable market.
  • Economies of Scale. Setting aside, for now, the clear potential to consolidate back office operations, the deal comes with ample potential scale benefits.  One of the most attractive aspects of VCA is its lab business, Antech Diagnostics.  While Antech is already the reference lab for Banfield, they also drive meaningful volumes for IDEXX (in-house diagnostics and consumables) and ABAXIS (hematology).  Some of this business is expected to flow to Antech over time.  Additionally, the two organizations have distinct distributor relationships, with VCA linked with Henry Schein and Banfield working with MWI.  We would expect this business will soon be up for grabs.
  • Acquisitions. While we expect Mars will be out of the hospital acquisition game for a short period, given that there is 90% of the market still to capture and roll-ups continuing to happen, we expect they will be back in the market as a buyer within 12 months.  However, the combination will remove a meaningful source of price inflation in the market, where VCA and Mars have historically gone head-to-head for attractive deals, thereby driving up price. Unless someone else fills this void, I would expect sellers would lose leverage as private equity is unlikely to be a competitor in a rising interest rate world.
  • Shifting Exposure. As the largest veterinary asset in the Mars portfolio, Banfield presents some unique problems in that its growth is largely tied to unit growth at PetSmart.  PetSmart was previously a 21% owner of Banfield’s parent, Medical Management, Inc.  Mars repurchased PetSmart’s interest in the company in late 2015, in a deal that has largely gone under the radar. The majority of Banfield hospitals operate inside PetSmart locations.  In contrast, VCA clinics are standalone operations.  With PetSmart box growth rate waning, gaining additional exposure to the standalone clinic market diversifies risk for Mars.

While the transaction between Mars and VCA may make very good business sense, it remains to be seen how consumers will benefit.  Most of the marketplace discussion has been about the potential for limited choice and rising prices, as opposed to better service and value for consumers.  As Millennials grow in terms of pet ownership, they may also view this as a further “corporatization” of the veterinary market and seek service elsewhere. Only time will tell.

/bryan

Note: This blog is for informational purposes only. The opinions expressed reflect my view as of the publishing date, which are subject to change. While this post utilizes data sources I consider reliable, I cannot guarantee the accuracy of any third party cited herein.

skyThe pet industry continues to work through a series of fundamental issues — demographics, channel shift, brand attributes — that, over time, are expected to reshape the competitive landscape.  While fundamentals are favorable — consumption, consumer confidence, employment, real wages, housing — these tailwinds are not sufficient to float all boats.  When the market bifurcates into “leader” vs. “laggard”, and the historical leaders now find themselves playing catch-up, you get dynamic market shifts.  While there are signs of a transition in process, this cycle is only now gaining momentum, and inertia will take some time.  In the interim, here are the key trends we are keeping an eye on over the forward six months:

  • Growth On Pace for Anticipated Uptick.  The pet industry experienced a relative malaise in 2015, with industry growth, as measured by APPA figures, slowing to 3.8%, despite a 0.3% uptick in performance of the food category, the largest component of pet spend (~38%), to 3.5%. Based on macro indications the industry appears on pace to exceed projected 2016 growth of 4.3%, driven by an acceleration in consumables.  That said, a rising tide is not lifting all boats. Growth is manifesting itself in a much more pronounced way, from a percentage standpoint, among independent retailers and brands, from brands that have managed the digital migration of their message and products effectively, and from brands that rely on or incorporate alternative form factors. Growth, in isolation, masks a myriad of problems. Large retailers and major pet food marketers risk further erosion of their franchises if they don’t adapt more quickly to emerging ownership and channel realities.
  • Industry Working Through Transitionary State. The foundation of our Spring 2016 report was the observation that the industry was undergoing a restructuring, and would remain that way throughout 2017. This restructuring involves tactical changes to embrace evolving ownership demographics and consumer behavior patterns. We are seeing signs that many key players are in fact moving to action. A number of larger manufacturers are actively working through their digital strategies and assessing how they develop both ecommerce and customer analytics capabilities. Mid-sized box chains and distributors are evaluating alternatives for addressing online gaps. Several key pet specialty brands appear poised to move to FDM. Finally, online retailers and large distributors seem to be headed towards a convergence. While not all the key transitory events identified are in play, the industry is shifting before our eyes. These changes should drive increased M&A activity.
  • Small Box World is Consolidating.  The rise of the independent pet channel has been one of the greatest value creators for the pet industry post-recession. Growth in small box and mid-sized chains has paid significant dividends for the brands that cater to them, the distributors that serve them, and the owners of the most professionalized operations. This channel is viewed as the champion of the consumer, providing them with education and advice and, as a result, has attracted a slew of authentic brands seeking to monetize this connection. Now the channel is consolidating. While acquisitions by Tractor Supply, Pet Supplies Plus, and Pet Valu are most notable, so to is the external communication from companies like Chuck & Don’s and Bentley’s Pet Stuff that they are seeking acquisition opportunities. Many chains will have to choose whether to participate in this race for scale and geographic expansion, or temper their growth expectations.  Long term, omnicannel will win in both broader retail and pet.  However, to develop these capabilities a certain scale is required in order to justify the investment.
  • Deal Volume Increases but Not Realized Outcomes. When industries undergo evolution, transaction velocity predictably increases as companies try to reposition themselves for the next growth cycle. This phase began in 2H2014 when pet industry M&A activity spiked and continued through the record year of 2015.  While we continue to see elevated levels of market activity in 2016, it has yet to translate into a pace of closed deals that would match the prior year period, making it likely 2016 will be a down year for closed deals.  The reasons for this are multi-faceted. First, when large strategic buyers are working through their own portfolio issues they tend to prioritize their current brands at the expense of M&A. Second, as buyers step further out of their comfort zone, they tend to be more price sensitive. Finally, a number of buyers continue to digest their acquisitions from 2015, making them less aggressive on the M&A front. Couple this with continued high valuation expectations on the part of lower middle market sellers and you end up with more failed sale processes.

As always, a complete copy of our 2H2016 industry report is available by email.

/bryan

Note: This blog is for informational purposes only. The opinions expressed reflect my view as of the publishing date, which are subject to change.  While this post utilizes data sources I consider reliable, I cannot guarantee the accuracy of any third party cited herein.

dog-bowlBeing early, wrong, or both is no fun, at least not in the case of making industry predictions (traders will also say early is also wrong).  And when it comes to our views on the waning of the pet food upgrade cycle many people have made us aware that we were either early or wrong (or both!).  However, when you make market predictions based on limited information you are going to be wrong, sometimes with regularity (see my view on the inability for private equity to acquire PetSmart here, as just one notable example where I have missed the mark, but at least I correctly predicted that they would not combine with Petco, see here), and we are okay with that.  That said, here I am not sure we were either wrong or even that early in this case.

In 2013, we began to beat the drum about the deceleration of the pet food upgrade cycle (for those of you scoring at home you can see comments here and here).  Our view was that basic economic realities were fundamental headwinds — stagnant wage growth, slowing pet replacement, growth in small dog ownership, and continued food price inflation.  We then pointed to PetSmart comps going flat to negative, and fully negative ex-inflation, for most of 2014, had to be a sign this cycle was on life support.  However, all of these factors were explained away by other data — accelerating pet product Personal Consumption Expenditures in 2015 (Bureau of Economic Analysis), recovering pet adoptions in 2015 (PetPoint), accelerating pet food spend in 2015 (APPA), growth in alternative form factor pet food (GfK), mismanagement at PetSmart (pick your favorite equity analyst), and the successful Blue Buffalo IPO.  In short, for every fundamental premise we had on the offer, there was a data set that one could point to bolster their thesis.  The issue was that the evidence used to perpetuate the myth that the upgrade cycle was alive and well was easy to debunk, but nobody want to hear it, and they still don’t.

Fast forward to today, and we now see increasing direct evidence that supports our thesis.  First, last month The J.M. Smucker Company trimmed its full year earnings forecast on the basis of declining sales of pet food for the quarter, down 6%. While there was a positive spin around the narrative (difficult comps due to prior year sell-in, strong new brand sales prior year), it is concerning.  The company expects weakness to persist throughout the balance of the year.  Second, our survey of private mid-market pet food marketers ($100+ million in revenue) indicates that the malaise Smucker’s is experiencing is not isolated, though the magnitude is greater.  Most of the company’s we surveyed offered full year views of 0% – 2% growth domestically. Finally, Tractor Supply, which does a significant percentage of its business in livestock and pet supplies (44%), trimmed its quarterly earnings forecast and full year outlook for the second time this year.  The company now expects same-store-sales for the quarter to be flat to down 1% after being up 2.9% in the prior year period. While we may not think of Tractor Supply as the prime destination for the premium pet food consumer, they do sell a considerable number of premium brands – Blue Buffalo, Merrick, Natural Balance, and Wellness, among others.  The company pointed to slowing growth in the C.U.E. (consumables, usables, edibles) business. Translating the semantic hieroglyphics, this means their pet and animal products business, including pet food.  We suspect Tractor Supply is not alone.

What is more important here than being right or wrong as it relates to the state of pet food, is what will the implications be for the capital markets of the death of the cycle.  We do not believe that slowing pet food sales, premium or otherwise, is going to hamper capital formation. There remain multiple heuristics of emerging brands garnering footholds to grow their business rapidly to $25 – $50 million in sales with limited capital investment.  The scarcity of these businesses, coupled with the amount of institutional capital chasing these opportunities, means that growth equity investments in pet food, distinct from treats, will remain robust.  Of greater significance is whether this will jump start a new M&A cycle.  While large strategic acquirers tend to have a negative M&A bias during period of weak financial performance, it might just be such that they will uses these events to recognize the need to buy into niches that represent the future of the industry.  This could push multiples, which have been waning, albeit, at the margins over the past three years to begin to trend up.  Further, the fact that broader M&A statistics indicate we are almost certainly at the end of this M&A cycle, might cause more sellers to come to the table.  Watch closely for M&A volume in this segment to tick up over the coming year.

/bryan

Note: This blog is for informational purposes only. The opinions expressed reflect my view as of the publishing date, which are subject to change.  While this post utilizes data sources I consider reliable, I cannot guarantee the accuracy of any third party cited herein.

 

 

 

 

Next Page »