BC Partners to split up PetSmart and Chewy

BC Partners plans to disentangle pet supplies retailer PetSmart from online rival Chewy, via a recapitalization plan.

Why it matters: This reflects PetSmart's improved performance, driven largely by increased pet adoptions during the pandemic. It's also a tacit admission by BC Partners that its original investment thesis was flawed.

• BC bought Chewy in 2017, in part by piling new debt onto existing portfolio company PetSmart, and then took Chewy public in mid-2019 while retaining almost total voting control.
• PetSmart would be recapped with $1.3 billion in new equity and its $4.65 billion of debt would be refinanced (with pro forma leverage decreasing from 3.5x/5,6x to 3.2x/4.2x, per LevFin Insights).
• Commitments are due next Thursday, although there's no guarantee this deal goes through.

The bottom line, via Bloomberg: "The transaction is likely to be seen more favorably by creditors compared to a 2018 deal in which BC Partners put a portion of Chewy’s equity outside the reach of PetSmart lenders."

• "They argued that PetSmart was insolvent at the time of the transfer, and that the move was thus fraudulent. PetSmart eventually got a majority of its lenders to approve amendments to their documents to squash the dispute."