BC Partners got creative with PetSmart when faced with anemic exit environment

UPDATED: With many exit routes blocked – most notably the IPO path – private equity firms are turning to other PE firms for help growing big businesses. Back in July, BC Partners brought in Apollo Global Management to take a minority stake in PetSmart, a business BC bought in a take-private deal back in 2015.

PetSmart’s journey is an interesting one, involving the increased role pets play in our lives and the struggles retailers face as consumer habits change. It’s also a tale from which other PE firms may learn some new tricks. To find out more, PE Hub spoke with dealmakers at BC and Apollo.

“The exit environment in both Europe and the US continues to be very anemic,” Alexis Maskell, partner and head of investor relations at BC told PE Hub. “Volumes are down almost 50 percent and, in some cases, more than 50 percent. Deals that are getting done typically involve either a strategic who can take a longer-term view or some form of existing firepower or continuation vehicle to facilitate a transaction or minority sale.”

When it came to PetSmart, rather than pull the lever on an IPO or sell the company, London-headquartered BC Partners opted to wag its tail in another direction. The result was the deal with New York-based Apollo, which has long admired Phoenix-based PetSmart.

BC will remain the majority shareholder of PetSmart and will retain control of the board when the deal closes, which is expected later this year.

Maskell said the gap in bid/ask between buyers and sellers remains wide, as everyone has been waiting over the last 18 months for a recession to arrive. As the outlook becomes clearer by the end of the year, it should help drive activity. Possibly then, an IPO or a sale could be a reality.

Backstory and the Chewy factor

After leading the purchase of PetSmart for $8.7 billion in a deal that took the company from public to private in 2015, BC weathered a storm of declining sales suffered in the immediate years after the acquisition. Clouds included the lack of a solid online strategy and some product mix issues. In 2018, the deal team led by BC Partners chairman Raymond Svider, took a hands-on approach and brought in a new CEO, JK Symancyk. By 2019, the skies were brighter.

The numbers speak for themselves. In 2014 before BC invested in it, the company had just over 1,400 stores open. Today it has over 1,660. PetSmart went from $7.1 billion in sales in 2014 to $10.3 billion in 2023. EBITDA was at $1 billion in 2014, and today it’s approaching $1.6 billion.

Among the innovations, BC helped launch and implement the creation of PetSmart’s loyalty program, which has over 62 million customers signed up now. Under BC’s ownership, there was an emphasis placed on growing private brands through re-invigorating existing brands and launching new ones under the PetSmart banner. Today private brands represent 30 percent of PetSmart merchandise sales.

Despite the solid growth story, BC has not exited the investment. “In many ways, [PetSmart] is a victim of its own success as it’s grown to a size that naturally limits its exit options,” Maskell said.

Along the way, BC acquired online pet retailer Chewy in 2017. Both Chewy and PetSmart were purchased from a Fund IX holding company, but they were never integrated and are best viewed as sister companies, Maskell explained.

“The companies have clear and distinct customer propositions, which are largely complementary,” Maskell said. “PetSmart delivers a large range of services, such as grooming and vet practices, which are not available online. In many cases, the physical store presence provides greater convenience, for example, in rural and suburban areas where people drive to work and can pick up pet food on the way home; whereas Chewy has clear proposition on convenience, working well in urban areas, where people buy a lot of products online and have them delivered.”

In April of 2019, BC Partners took Chewy public. The firm still owns 70 percent of shares in the online retailer.

BC has other pet-related businesses in its portfolio. The firm has control interest in Vet Partners, a London-based vet services company acquired by BC Partners in 2018; and Pet City, a Koropi, Greece-based pet store chain acquired by BC in 2021.

BC has been exploring a sale of Vet Partners this year.

Apollo leans on retail experience

PetSmart has long been a company that Apollo was interested in. The firm was one of the competitors in the running to acquire PetSmart back in 2015.

Apollo partner Andrew Jhawar said Apollo has significant familiarity in the retail brick and mortar space. This includes Smart & Final, a Commerce, California-headquartered warehouse store for household and business customers that the firm acquired in April of 2019 for $1.1 billion. It sold the company to Mexican grocery and department store chain Grupo Comercial Chedraui for roughly $620 million in 2021.

In 2016, Apollo acquired Greensboro, North Carolina-based grocery chain The Fresh Market for $1.3 billion and sold its majority stake in the company to Chile-headquartered multinational retailer Cencosud in May of 2022. In April of 2011, Apollo acquired a majority stake in Phoenix, Arizona-based retailer Sprouts Farmers Market and the company made its IPO in July of 2013.

“Across our portfolio we look to make investments in companies with strong fundamentals and defensible business models,” Jhawar said. “PetSmart was a natural fit and we have decades of experience in the retail industry with a highly successful track record in consumables businesses such as grocers, which in many ways are akin to PetSmart.”

Booming pet industry

Annual spending on pets has risen consistently the past few years according to the American Pet Products Association. Americans spent $136.8 billion on their pets in 2022, an increase from $123.6 billion in 2021. The APPA predicts the amount will rise to $143.6 billion this year.

PetSmart is just one example of the interest in pet care that has occurred in private equity. There’s been an uptick in pet related deals that PE Hub covered recently.

In June, A&M Capital-backed BrightPet bought pet food company Raw Advantage, and Topspin Consumer Partners acquired creator of dog treats Three Dog Bakery’s consumer products division.

PetSmart’s latest investor is optimistic about the future.

“PetSmart operates in an industry that historically has grown every year since 2000 and two-times the rate of GDP during multiple recessions,” Jhawar said. “They should continue to take their share of that expanding market with successful execution of the base plan and see opportunities on top of that still – whether it’s investing behind omni-channel offerings, expanding services, exploring small format stores and expanding the private brand offerings.”