In biggest PE deal of 2014, PetSmart sold for $8.7 bn

The biggest private equity deal of 2014 - in a year of huge takeovers of cable providers and drug manufacturers - is a bet on the lucrativeness of dog food and catnip.

PetSmart agreed on Sunday to sell itself to a group led by the investment firm BC Partners for about $8.7 billion, months after the retailer came under pressure from two hedge funds.

The agreement represents the biggest leveraged buyout of an American company in a year that has been defined by huge mergers - most of which have been by corporate buyers, not private equity firms. Though the dollar amount of the takeover of PetSmart is much higher than that of the next-biggest buyout, the $5.4-billion sale of Gates Global, it is significantly smaller than the $48.5-billion takeover of DirecTV and the $45-billion sale of Time Warner Cable, both of which are pending.

But PetSmart has long been seen as a good target for private equity firms, given its relatively strong cash flow and low debt. In a leveraged buyout, private equity firms generally finance the majority of the purchase price with borrowed money.

PetSmart operates more than 1,300 pet stores in the United States, Canada and Puerto Rico.

"The question is, 'Why haven't there been more people interested in PetSmart?'" said Raymond Svider, a managing partner of BC Partners. "The category of pet products has been growing in the US and abroad consistently for a number of years."

The retailer disclosed in August that it was exploring a sale after Jana Partners, the big activist investor, emerged as a major shareholder. The pet supply company had already been weighing its strategic options as its sales had begun to slow.

By that time, Jana and another firm, Longview Asset Management, had begun agitating for a sale of the company. Jana now has a stake of 9.75 per cent.

The months-long auction of PetSmart eventually drew the interest of some of the biggest private equity firms, including Apollo Global Management, Kohlberg Kravis Roberts and Clayton Dubilier & Rice.

Ultimately, BC Partners, a European-American firm with about $15 billion under management, and some of its own investors emerged as the winner. (Longview, which owns a stake of roughly 9 per cent in PetSmart, will roll over about a third of its holdings into the newly private retailer, cashing out the rest of its shares.)

Under the deal's terms, the consortium will pay about $83 a share in cash, about 6.8 per cent higher than PetSmart's closing price on Friday and about 39 per cent higher than the closing price on July 2, the day before Jana emerged as a shareholder.

"We are pleased to have reached this agreement with BC Partners, which maximises value for all of our shareholders and best positions PetSmart to continue to meet the needs of pet parents," Gregory P Josefowicz, PetSmart's chairman, said in a statement.

"This transaction represents the successful conclusion of our extensive review of strategic alternatives."

Though debt financing remains extremely cheap, private equity firms have found themselves shut out of many takeover auctions, unable to compete with the prices that strategic buyers can offer. Instead, many of these investment concerns have been striking smaller deals, or buying minority stakes in companies.

By teaming up with its limited partners, including a Quebec pension fund, BC Partners was able to cobble together enough money to finance the deal without having to join with a rival firm. (KKR and Clayton Dubilier, by contrast, teamed up during the auction process.)

"This is typical of the types of acquisitions we want to do, one that's in partnership with our LPs," Svider said, referring to his firm's investors as limited partners.

The transaction is expected to close in the first half of next year, pending approval from shareholders and regulators.

JPMorgan Chase and the law firm Wachtell, Lipton, Rosen & Katz advised PetSmart. Simpson Thacher & Bartlett and Ernst & Young provided advice, while Citigroup, Nomura, Jefferies, Barclays and Deutsche Bank provided debt financing.

©2014 The New York Times News Service