Pampered pets set Wall Street on prowl for deals
Gordie Spater has been manufacturing dog harnesses for nearly 15 years on the northernmost reaches of the Massachusetts shoreline, but he is in high demand right now on Wall Street.
His brand, Kurgo, occupies the sort of niche coveted by investors looking to profit from the US pet economy, a range of outdoor gear and accessories for the traveling mutt.
Consumers’ increasing tendency to treat their pooches like family, along with the retail industry’s need for new products to lure people online and in store, have created a boom in deals for companies catering to pets.
Food brands, particularly those offering premium, natural ingredients, have been among the most popular acquisition targets in the pets space. But as the number of major, independent players shrinks and valuations get steeper, buyers are setting their sights further afield – at niche products such as snacks and accessories and services including grooming and doggie daycare.
“We’ve been looking in detail at opportunities in many of the categories over the past 24 months,” said David Fiorentino of private-equity firm J.W. Childs Associates. “There has been a lot of competition among investors for buyouts, especially companies with more than $30 million to $40 million in revenue.”
So far this year, there has been at least $8.3 billion worth of transactions, involving veterinary clinics in Australia, cat snacks in the Netherlands, pet insurance in the United States and canine raincoats in Italy.
Buyers include private-equity firms such as KKR and consumer giants like General Mills Inc., which are looking to expand beyond cereals and yogurts for humans to high-protein meals for dogs and cats with sensitive stomachs.
The start to 2018 is close to the same period last year when there was the highest total value of pet-related deals in 16 years. Pet deal-making has dipped 6% on last year’s total value of deals, while deal-making in the wider consumer industry has slipped more than 22% so far this year compared with 2017, Thomson Reuters data shows.
Spater has been fielding inquiries almost every week from private-equity funds and companies looking to buy Kurgo, which he founded with his brother Kitter after the latter rigged up a “backseat barrier” with some mesh and bungee cords to stop his Plott Hound Zelda from jumping out of the trunk of his car.
“Obviously, retail is a challenging space, but there’s a lot of activity in the pet specialty space,” Spater said. “I think the consolidation is definitely here.”
David Blatte, a board member of rival cat- and dog-accessories brand Worldwise, expects the emergence of so-called “pet parents” among Millennials and Baby Boomers to create a large, lucrative gap for health-conscious, high-end products and services.
“It’s unbelievable,” he said. “This is the most white space of any consumer sector.”
Blatte is a former consumer-products investment banker who is currently looking to buy companies that sell luxury pet totes and doggie dental-enhancing chew toys.
Adding to the pressure to consolidate are the distributors, who want suppliers with scale and a wide variety of products.
“A lot of these retailers want to deal with less vendors,” Blatte said. “We do somewhere like three to four acquisitions a year, smaller pet companies, and we bring them into the Worldwise umbrella.”
Among the more significant deals in the space this year was General Mills’s acquisition of pet-food maker Blue Buffalo Pet Products Inc. for about $8b. in cash.
That price equated to about six times annual sales, according to investment manager Susquehanna International Group, a valuation similar to the sort of multiples seen for health-oriented human foods, including Kellogg Co.’s $600m. deal for upstart healthy snack maker RXBar and Dr Pepper Snapple Group Inc.’s $1.7b. deal for drinks brand Bai.
“Valuations are steep,” said Tim Larsen, a managing director at investment bank Houlihan Lokey, which has negotiated a number of pet deals.
According to Larsen, even in the universe of private companies, many pet-company acquisitions this year and last have been struck at low- to mid-teens profit multiples. This compares to a multiple of about 10 times across the consumer industry more broadly last year, according to Thomson Reuters data.
For many acquirers, there is competitive pressure to get involved. To match consumer conglomerates Nestle, Colgate-Palmolive Co. and J.M. Smucker Co., which all have pet-care divisions outpacing core company sales, agricultural giant Cargill ramped up its pet-food manufacturing facilities in January through the acquisition of Ohio-based Pro-Pet. The price was not disclosed.
“When you sit down with your strategic customers and you have every one of them say to you that premium pet is where they need to invest, and they need you to be there with them, that’s a glaring reason to invest,” Cargill Feed and Nutrition retail director Christi Brown said.
DOG SALONS
US consumer spending on premium dog and cat food – the sort of meals that combine deboned meat with garden veggies – is expected to accelerate by 16% in total over the next five years, compared with 12.2% for pet food more generally, according to market research firm Euromonitor.
Spending on toys, carriers and bedding, as well as food brands for therapeutic or “prescription” diets are also set to grow at a breezy clip of between 12.1% and 12.6% even as the total population of pets stays the same, Euromonitor said.
With a scarcity of targets with scale, Larsen and other M&A advisers are looking at smaller deals focused on healthy foods and snacks.
“I think that there should be a wave of deals over the next one, two, three years,” he said.
Cat catering is also expected to be a growth area, along with premium services aimed at dogs, such as grooming and doggie hotels.
Dan Barton’s no-expense-spared dog salon chain Splash and Dash Groomerie, headquartered in Florida, still has only 18 franchises generating $14m. in annual revenues across the network. But it receives approaches on average every few months from prospective acquirers.
“The big players have been all focused on the food industry, and that’s where there have been a lot of mergers and acquisitions,” he said. “Players in the service industry, there’s not many at all.”
“My dog Mercedes is like a family member to me, like my child,” said Barton, who sees his own preferences mirrored in younger consumers. “That is a huge market now that is just starting to become a huge industry.”
Gordie Spater said that is what is different from older generations of pet owners. His business was established trying to keep dogs stowed in the trunk of a car, but in the future, people might prefer to have them travel upfront, he said, and that evolving relationship will require different types of products.
“I go into my daughter’s room this morning, and even though my dog is 80 pounds, he slept on the twin bed with her all night and does most nights,” Spater said.
(Reuters)
Cat catering is also expected to be a growth area, along with premium services aimed at dogs, such as grooming and doggie hotels