m&a


normalThe pet industry appears closer to arriving at a “new normal” that more closely resembles its human corollary.  The consumer has migrated to the center of the ecosystem, dictating the what, when, where, and how much, as opposed to having to select from a limited set of curated choices prescribed by brands and retailers. Brands are now closer to the consumer than physical retailers, thereby occupying more coveted intellectual real estate, and as a result are better positioned to influence behavior. Large channel dedicated physical retailers are left to compete on the basis of price, leading to a downward spiral in performance, which will persist until they can find ways to differentiate through merchandise mix and/or convenience.

The two largest drivers of disruption have been acquired, which represents an opportunity for the emergence of a new competitive landscape. As Blue Buffalo migrates further into FDM, it provides pet specialty retailers an opportunity to break away from their dependency on the brand for both customer acquisition and growth. Changes in Chewy.com ownership and management, coupled with PetSmart’s debt burden, is likely to usher in a more cost focused form of competition.

We believe these collective changes will manifest themselves in meaningful ways over time. Independent pet retail will return to its role of facilitating brand discovery and educating consumers, reducing dedicated Blue Buffalo shelf space – the manifestation of its conviction to place support behind channel exclusive brands. Major pet specialty will reorient its merchandising strategies around solutions, reducing dependency on brand blocks and ensuring a product mix that offers consumers a range of options and various price points (ultra premium, premium, premium value, etc.) and place greater emphasis on services to drive traffic and transactions. Manufacturers will look for opportunities to engage in direct sales with consumers to diversify channel risk and to offer end customers solutions that are customized for their pet’s situation.

The changing nature of competition will continue to drive industry consolidation. We believe large retailers will make acquisitions to add alternative store formats, service capabilities, additional direct-to-consumer channels, and supporting technologies – but lacking financial resources their options may be constrained.  In the case of PetSmart and Petco, we believe this could lead to a merger given the opportunity to rationalize costs. Leading food brands will look for ways to get closer to the customer, either through technology or acquisitions that have distribution outside of traditional retail. Product companies will look to acquire solutions that can diversify their mix and add capabilities that will enable them to address emerging channel opportunities.

To read about our complete set of industry insights, contact me to receive a complete copy of our Spring 2018 Pet Industry Report.

/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.

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blue bffThese things always happen when you are on vacation.

Just prior to my departure on family vacation, I got a call from a reporter passing along a rumor that Blue Buffalo was going to be acquired.  I hear about non-existent pet food M&A rumors week in and week out.  The past month has been no exception.  Most of it is smoke, without the fire.  My response to the reporter — who has $8 billion to spend? On the plus side, I had the price pegged.  Kudos to her for getting the beat correct.

In reality, there are many large corporations with access to those sorts of funds.  Mars had recently doled out $9 billion for VCA after all, and Nestle has a little over $8 billion in cash on its balance sheet.  Apple has $77 billion of cash on its balance sheet, but they tend to favor in house innovation.  The key point is that major pet consumables acquirors have focused largely on product acquisitions to fill portfolio gaps as opposed to transformational M&A.  After all, Purina could have easily acquired Blue Buffalo for $3 – $4 billion prior to its public offering and the two sides could have avoided a lot of subsequent legal fees (further evidence that lawyers always win). I don’t see any of them coming in with a topping bid — Blue in the hands of General Mills is less formidable than Blue in the hands on a proven competitor.  That said, Blue in the hands of General Mills might make General Mills a more attractive takeout target for Nestle.  After all we are likely going to see more mega food M&A as these players grapple with changing operating dynamics for global food companies.

Food companies buying into the pet space is not unprecedented.  The J.M. Smucker Company acquired Big Heart Brands for nearly $6 billion back in 2015.  When Merrick Pet Food was sold, a major food company was the cover bid when Nestle acquired the business.  That said, I don’t see this as establishing a pattern whereby food companies quickly seek to align themselves with pet food brands in an effort to top one another.  Rather, I expect food companies will be more open to kicking the tires in auction processes but that acquisitions are likely to be focused only on true market leaders, consistent with what we have seen thus far.  That said, major food companies could offer pet food leaders unprecedented valuations, given their propensity to pay 5.0x – 6.0x revenue for the growth associated with disruptive brands (e.g., Rx Bar, Daiya, Krave, Suja, to name a few).

Finally, we have to give Blue Buffalo kudos.  They very effectively ran the business into a highly attractive exit (6.3 x Revenue / 25.5x EBITDA).  Twelve months ago, the company seemed stalled.  Growth was clearly flattening due to performance malaise in PetSmart and Petco, who were both undergoing inventory deleveraging, consistent with what was happening in broader retail, at a time when traffic and transaction metrics in these boxes were sagging.  The launch of their veterinary product line, while conceptually interesting, would have a long lead times in terms of sales – veterinarians seem to enjoy the status quo.  Thus, the jump to FDM, made possible by the weakness in major pet specialty, breathed life into the equity.  The company’s stock climbed 40% during the past six months, despite the fact that the FDM roll-out lagged expectations and sales were highly incentivized through discounts and promotions.  All we can say is well played and congratulations to the Bishop family and the Invus Group.

What will surely follow this acquisition is a public airing of grievances about a brand selling out and trip down memory lane for the industry recalling times where brands had values.  This will not be the last time this record is played.  However, the pet industry has been professionalized over the past 10 years and operates with a profit motive, we should have no expectations that capitalistic intentions will be subjugated in an effort to adhere to historical edicts. Rather mourn the transparency again lost through a publicly traded pet company gone private or having been acquired.

/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.

happy faceThe pet industry, for all its interest and fanfare, is a data starved segment of the consumer landscape.  The industry lacks for data solutions that would provide a dynamic understanding of industry, channel, and company level performance.  Instead, operators and investors are left to rely on summary level government reporting, annual data releases from industry associations, specialized proprietary data reporting from industry participants, and select data points from publicly traded companies, that when put together provide a general understanding of industry growth and direction.  As the pet industry further expands into the food, drug, and mass channel data should improve, but this will take time.

As we wait for APPA data to be released at Global Pet Expo in March, we thought it might be useful to use the other available data sources to paint an industry picture ahead of the tradeshow season.

  • Growth:  The pet industry continues to grow at levels in excess GDP (2.3% in 2017).  Pet related Personal Consumption Expenditures, measured by the Bureau of Labor Statistics posted 6.5% growth in 2017, driven by 9.7% growth in Services PCE.  Product PCE growth was more muted at 4.2%.  The industry experienced a deflationary trend in pet food of 1%. Services inflation continued at just short of 2%.  The variance in PCE versus APPA growth figures has been expanding, meaning the data sets are getting less correlated, for reasons that are unclear. However, based on the underlying PCE data it is safe to assume that growth was steady in 2017, but it is unlikely that we returned to 4%+ growth.  Continued deflationary pressure in pet food is a long-term headwind, which services inflation could constrain pet population growth for cash starved Millennial pet owners.
  • Economic Tail/Head Winds: Growth in the pet industry is, in our experience, tied to three economic factors.  First is employment.  People who are employed are more likely to have income to afford a companion animal and a living situation that would allow for pet ownership.  Currently, unemployment is at a structural barrier, which has been good for pet ownership growth over the past 12 – 18 months.  However, it seems the industry is getting as much benefit from the employment situation as one can expect. Unemployment has also declined due to people leaving the workforce, meaning the benefits of full employment on the pet industry in recent years is somewhat overstated.  Second, is disposable income.  The cost of owning a pet continues to increase. According to the APPA Pet Ownership Survey 2017 – 2018, the annual cost of owning a dog is greater than $1,500.  Some surveys put the lifetime cost at over $25,000.  To afford these costs, pet owners need disposable income. Yet growth in disposable income has been tepid over the past over the past 24-months. The recently passed tax reform should benefit income trends, but potentially at the expense of inflation. Psychologically income trends should be healthy for pet ownership as consumers tend to overlook cost inflation in the near term. Third, is home formation.  When a family unit purchases a home, it is often a catalyst for purchasing a companion animal.  Low interest rates and sustained economic growth have led to a strong demand for housing, despite concerns about affordability given current home prices.  Home formation trends should continue to benefit the industry, though rising interest rates may cause home formation trends to taper.
  • FDM Growth: The launch of Blue Buffalo in the mass and grocery channel is a game changer for the industry.  A myriad of other brands are launching outside the pet specialty channel, such as Nutro in Walmart, and we expect PetSmart and Petco will be offering a competitive response in their next reset.  The issue is that PetSmart and Petco cannot offer brands the same growth trajectory they have enjoyed in the post-recession period.  Quite simply, consumables availability has become ubiquitous; consumers are simply choosing a transaction venue based on convenience weighted cost.  The consumer relationship is with the brand, not the retailer.  Even with only six months of Blue Buffalo exposure, which has slightly underperformed and been aided by significant discounting and promotional spend, in 2017 pet consumables growth in FDM is estimated to have exceeded that in pet specialty — 2% compared to 1.5%.  This bodes well for growth among brands with existing FDM shelf space, though the ability to hold that space going forward is going to become increasingly competitive.
  • Ecommerce Growth Continues:  In 2016, industry analysts, based on very limited information, estimated that ecommerce penetration in the pet industry would eventually grow to 20%.  At the time penetration was estimated to be +/- 5%.  According to Amazon, they estimate ecommerce penetration in the pet space will reach 18% in 2018, meaning the industry will almost certainly breach 20% and do so in 2020.  Amazon recently stated that they viewed the industry as a “unique and highly valuable category” and they intend to make growing their online sales of pet products a 2018 business priority.  Additionally, the proliferation of direct-to-consumer pet food brands (Ollie, JustFoodForDogs, etc.) and sales platforms (Petnet, PetCube), many of whom are now venture backed, will give the broader sales channel additional tailwinds. We also see aging pet parents as a further opportunity to grow pet ecommerce. As consumers get mobility constrained they are increasingly turning to online venues for product acquisition. We believe they will do so with their pet spend, especially pet medications. The unanswered question is how MAP pricing might impact online channel sales.  Ecommerce has grown substantially based on its pricing advantage.  As that narrows, it would logically impact purchase intent unless it offers convenience benefits that outweigh the alternatives.

For the past two years, we have talked about an industry in flux.  While we believe the industry continues in a state of transformation, we think we are through the most volatile phase of the change cycle.  The truth is there is some stable thematics — steady growth aided by modest tailwinds, customer first retail, and dissolving incumbent paradigms.  Companies that can build a salient customer value proposition and innovate stand to do just fine against this continually evolving backdrop.  Those that rely on historical paradigms as a means of competitive advantage seem more likely to get run over.

/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.

 

 

Where you stand, depends on where you sit.” — Rufus Miles, Princeton University

m8bAs we round the “club house turn” for the calendar year, it is natural to begin focusing on the year ahead and what it might hold (or bring, depending on your preference).  It is common for these final days to be filled with conversations about what we are seeing today and what we anticipate tomorrow.  As we catalog perspectives, through these conversations, as it relates to the next twelve months for the pet industry, the narratives fall into one of two camps — the sky is falling or the sun is sure to rise tomorrow.  It appears which camp one finds themselves in is highly correlated to whether the outlook might benefit the prognosticating party.  This is the classic application of Miles Law.

Your guess is as good as mine with respect to where the industry might go in 2018.  However, here are the key things to watch:

  • Blue Boom or Blue Gloom? — If you talk to equity analysts, Blue Buffalo has become a battleground stock.  The long narrative is about growth as penetration increases.  The short narrative is tied to slower uptake and discounting in FDM, retailer retaliation, and class action litigation.  The recent sales data is compelling but it includes a considerable amount of sell-in and discount driven velocity.  One would be wise to wait until 2Q2018 to pass judgement, but patience is boring.  Bull Case: Gravity and Blue Buffalo have seldom been bedfellows, and today is not the day for them to become better acquainted.  Bear Case: When margin compression and the inevitable pet specialty scaleback hits the stock, it will be a wake up call for investors.  Magic 8-Ball Says: Signs point to yes.
  • PetSmart: Comeback Kid or Sophomore Slump? — The biggest unknown is how the revised PetSmart strategy will resonate in 2018.  The March consumables reset will provide meaningful insight into their Blue Buffalo sales replacement strategy.  We hear the new set is a literal “dogs breakfast” — something for everyone, including FDM brands bridging to major pet specialty.  How Pinnacle Pet Store performs will be critical.  Currently, the brands on promo are an eclectic mix.  We also know multiple PetSmart/Petco brands are in current FDM tests. I don’t put much weight into the prevailing theory that Chewy.com will get spun out from under the bondholders, but never underestimate private equity owners to further their own interest at the expense of debtors. With MAP pricing getting more prevalent, and with the major distributors over leveraged (see below), PetSmart could see improved traffic trends.  The bigger issue is how they create greater leverage with Chewy.com.  Currently, PetSmart is trading 40% gross margin customers for 10% gross margin customers.  We assume the loss of Champion and Fromm means any earnout in the deal is underwater making Chewy leadership a flight risk.  Bull Case: Blue FDM stalls, PetSmart gets traction with omnichannel capabilities, the bonds hit 80.  Bear Case: Did you know the private equity owners also control a crisis management PR firm?.  Magic 8-Ball Says: Cannot predict now.
  • Indy Sink of Swim? — Independents are also at a critical moment.  They have held the upper hand on selection and access and continue to enjoy that advantage due to Champion and Fromm channel conviction and access to emerging brands and alternative form factor foods. However, they generally lack an ecommerce strategy and a recession looms, all though tax reform may push that event down the road.  Of note, both Animal Supply and Phillips Feed Service are overlevered and credit analysis points to softness in the independent channel.  If the independent channel experiences product access constraints due to its reliance on these distributors, it will make it hard to effectively merchandise and retain customers.  Bull Case: Continued PetSmart malaise and erosion of online advantage through MAP keep indy on the front foot.  Bear Case: PetSmart turnaround coupled with distributor issues drives contraction within the category.  Magic 8-Ball Says: Ask again later.
  • Private Equity: Buyer or Seller? — Given late market cycle dynamics we are sure to see an uptick in transaction opportunities in 2018.  With a meaningful subset of strategic consolidators under pressure (some through no fault of their own) or hunting for transformative acquisitions (good luck), private equity is expected to play a larger role in the deal landscape during the balance of the cycle.  The recent sale of Outward Hound and Manna Pro Products, are evidence that private equity will pay-up for scale pet properties that have robust M&A pipelines. Further, the defensive nature of the pet industry is an attractive for private equity given the potential for a recession during their holding period.  Bull Case: Private equity uses the current market opportunity to create a number of new consolidator platforms.  Bear Case: Rising credit costs and channel concerns curtail interest.  Magic 8-Ball Says: Outlook good.

No matter where you stand, based on your last point of rest, it is hard to argue that the pet industry is no longer in the honeymoon phase. The change cycle that began nearly two years ago, continues. Signs point to further volatility ahead. However, with turbulence comes opportunity. Magic 8-Ball Says: It is decidedly so.

/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.

 

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.

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2. As anticipated, Blue Buffalo launched into FDM.

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

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

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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.

 

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.

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