Today Wall Street is chewing on the news that PetSmart ($PETM) has agreed to be acquired in an $8.2 billion private equity deal--the largest such deal of 2014. But what will the buyout mean for the company's presence in animal health, namely the veterinary clinics that it operates in more than 850 of its stores?
PetSmart's buyers aren't saying much yet about their plans for the giant retailer. The company is being purchased by a consortium led by BC Partners, working along with several of its limited partners, including La Caisse and StepStone, according to a press release announcing the deal. Longview Asset Management, which owns roughly 9% of PetSmart's outstanding shares, will be participating with about a third of its holdings, with the balance receiving the same $83 a share that the company's public shareholders will get.
Before looking at the potential impact of this deal on Banfield, it's worth taking a brief look at PetSmart's history in veterinary services. PetSmart opened its first veterinary clinic in 1992--just 6 years after its founding and one year before its public offering. It was part of the company's larger strategy to diversify beyond product sales and into services, which also included grooming and pet adoptions.
In 1994, PetSmart teamed up with Medical Management International (MMI) to open Banfield clinics in PetSmart stores. PetSmart currently owns a 21% stake in MMI Holdings.
In the third quarter of this year, PetsSmart's income before taxes and equity income for Banfield came in at $138.5 million, which marked about a 1% decline from the same period a year ago. Earlier this year, hedge fund Jana Partners bought up a large stake of PetSmart and started pushing for a sale, arguing that the company needed a strong turnaround expert to help it turbocharge its sales and profit growth. Longview added to the chorus of voices urging a sale.
Shortly after that, PetSmart announced it had embarked on a "profit improvement" plan to reduce its overhead costs and save $200 million a year. The company's performance in the third quarter included one-time costs associated with that program, according to its quarterly earnings release.
"PetSmart is an iconic brand and the category leader in the growing pet retail industry," said Raymond Svider, managing partner at BC Partners, in the press release announcing the buyout. "We look forward to working with management to continue growing PetSmart's business and executing against its recently announced strategic initiatives."
Boosting its service offerings is among those strategic initiatives, making it fairly safe to bet Banfield will continue to be a key player in PetSmart's future. As for how the company's new owners might position the veterinary clinics going forward, however, that remains to be seen.
- here's the press release announcing the buyout
- read more at The Wall Street Journal (sub. req.)
Editor's note: This story has been updated to clarify PetSmart's third-quarter financial results.