Apr 19, 2017

Behind PetSmart's $3.3 billion Chewy acquisition

Dan Primack, author of Pro Rata

Rick Scuteri / AP

PetSmart, a pet supplies retailer owned by BC Partners, has agreed to acquire pet-focused e-commerce company Chewy for around $3.34 billion, as first reported by Recode. PetSmart's strategy: The legacy retailer and Petco are dominant in the pet supplies market, but are dwarfed by Chewy when it comes to e-commerce. And since e-commerce is where pet food sales are heading ― no matter the bricks-and-mortar perks of on-site vet and grooming services ― this is a logical play. Even at PetSmart, physical retail is having some issues. LevFin Insights reports that the company had a 4.6% drop in same-store sales in Q4, although EBITDA grew by 2%.Chewy's strategy: This will help with distribution. And it's a massive check for a pair of Floridian founders, plus early investors like Boston's Volition Capital. But all signs were that this company could go public (perhaps after one more big, pre-IPO round), and now it's tied its horses to a physical retailer owned by a private equity firm known for its cost-cutting capabilities. Culture, meet shock. Understandable decision, but a highly unusual one.Here's the breakdown: League tables: This is the largest sale ever of a VC-backed e-commerce company, topping Walmart's $3 billion purchase of Jet.com. Money matters: The deal is being financed by new equity from PetSmart's sponsors, which includes both BC and groups like GIC, Longview Asset Management, Caisse de dépôt et placement du Québec and StepStone Group. Plus a new debt offering from existing PetSmart lenders Barclays and Citi. Breakdown: No announcement on the financial breakdown, but I hear that the deal includes around $2 billion in cash from the private equity firms, while the remainder is stock and/or retention packages. [Update: Another source says that Volition just sent out letters to limited partners, saying the full purchase price will be paid in cash at closing. Trying to reconcile the conflicting info.] Bank tellers: One reason it's so silly for PetSmart to be playing coy on the financing details is that most of it will come out when the banks go out to syndicate the new debt. Until then, what we know is that PetSmart de-levered a bit from its original 2014 buyout, from 6.4x EBITDA down to 5.6X after a dividend recap in early 2016. Sales pitch: If we all read the Miami Herald more often, we might have sensed that something was up. Speaking of Petco: For years there has been talk that PetSmart and Petco may merge, but that there were anti-trust concerns. This deal makes that tie-up even less likely.

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