The first quarter of 2015 has seen an unprecedented amount of announced and closed deals for the pet industry. In combination, the acquisitions of Big Heart Brands and MWI Veterinary Supply coupled with the take private of PetSmart resulted in a combined deal consideration of $17 billion. Not since Nestle S.A.’s acquisition of Ralston Purina for $12.1 billion in 2001 has the industry experienced such transaction volume, measured on a dollar basis, in a concentrated period. What is most notable about the Big Heart Brands and MWI Veterinary Supply transactions, beyond the headline valuations, is that they were driven by a convergence theme — that the companion animal industry has becoming comparable to its human corollary as to justify combinations across the aisle. So much so, that major players on the human side can justify buying into the pet side at premium prices.
Consider Smucker’s acquisition of Big Heart. Smucker’s, best known for their business in fruit spreads, coffee, and food service, has been experiencing revenue contraction and profit erosion since 2013, driven by declines in all lines of business. In an effort to reverse these declines the company, with one stroke of a pen, morphed itself into a pet business. Big Heart Brands is expected to deliver $2.4 billion in sales in 2015 to the combined entity, more than any other current line of business for Smucker’s. Big Heart is expected to grow between 5% – 6% each of the next two years, versus the balance of the company whose growth declined 4.9% in 2014 and whose growth is expected to decline another 4.1% in 2015. Three notable quotes from the company as part of the transaction speak to the convergence rationale of the acquisition:
- “With approximately two-thirds of U.S. households having at least one family pet, we will now be able to serve the mealtime and snacking needs of the whole family.”
- “[Big Heart Brands] fits extremely well with our purpose of bringing families together to share memorable meals and moments. And one of the key parts of the family nowadays, and probably has been historically, is your family pet.”
- “Our competency is really connecting with our consumers and building an emotional bond with our customers. Pet foods is the same way. And so, we really see a real opportunity for continuing to build that bond with the consumer. And once you do that, you can really have great products at a right price.”
Additionally, as conventional grocery seeks to recover its share of the companion animal consumables pie, Smucker’s will be serving largely the same retailer base from a supply standpoint adding additional comfort to the contemplated transaction.
The acquisition of MWI Veterinary Supply by AmerisourceBergen is not the first instance of a veterinary supply business merging into a company involved in servicing the human health market. However, the deal between the largest human pharmaceutical distribution company and one of the leading independent players in pet medications was also borne out of their similarities. In a discussion of the deal rationale, the following key comments are notable from AmerisourceBergen CEO Steve Collis as it relates to convergence:
- “As we got to know the MWI business better, it was more pharmaceutical-centric than we had realized.”
- “We really felt that there was a lot of complexity in this business, a lot of ability to drive new products, working with manufacturers, and an opportunity for global expansion that really dovetailed well into some of the past experiences AmerisourceBergen had enjoyed and had experience and been successful at.”
- “You know, they’re just a strong cultural fit. These are operators that are passionate about their business, that are trying to draw value for their customers and their stakeholders every day, so the two companies just could not have got on better.”
Notably in the deal announcement, AmerisourceBergen stated that entering into the animal health market was a logical extension for the company and the fact that each of the businesses relied largely on the same core competencies gave them comfort in the potential for the combination. Like the Smucker’s/Big Heart deal above, Collis made it clear they pursued the combination for the growth potential the pet industry offered them despite the fact AmerisourceBergen has produced robust topline growth in each of the past two fiscal years.
It will be interesting to watch how each of these deals delivers, or fails to deliver, on the anticipated potential of the combination. To the extent that these transactions are part of a broader theme, multiples for pet related exits could reach even further into the stratosphere. The pet industry has been wanting for improved exit market dynamics and these examples provide optimism that companies serving the human market might now be ready to become serial acquirors of pet related properties.
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.