It was the dog that finally did bark. When New York buyout shop Kohlberg Kravis Roberts & Co. agreed in January to snap up Pets at Home Ltd., Britain's largest pets and accessories retailer, private equity seemed to jump off its hamster wheel, breaking out of its cage with joyous yelps and canary twitter.
KKR's winning £955 million ($1.4 billion) bid assured the seller, London private equity firm Bridgepoint Capital Ltd., a return of more than 8 times its money -- and a spectacular valuation of more than 11 times Ebitda. Better still, after months of credit drought, the banks had started lending again. The deal was financed with debt of 5 times Ebitda.
Bridgepoint had also run a serious dual-track process, preparing the Handforth, England, retailer for a stock market listing and keeping its options open until the very last moment, so there were hopes in some quarters of a revival of initial public offerings.
Others were less convinced, although Bridgepoint hired Goldman, Sachs & Co. and Royal Bank of Scotland Group plc as joint bookrunners in the final weeks, to follow its earlier hire of J.P. Morgan Cazenove Ltd. as global coordinator, bookrunner and sponsor. Skeptics suggested that Bridgepoint was just raising the stakes to get a better price in a private sale and did not want to be left with a minority holding following an IPO, no matter how successful. "Everyone said it was always going to be a trade sale," says a source close to the U.K. firm, with a note of disappointment at the critics' lack of belief. "But it was a genuine dual-track process, right to the end."
The bidders in the auction also seemed to believe an IPO was a real alternative. KKR beat Apax Partners LLP, Bain Capital LLC and TPG Capital in an auction run by Majid Ishaq of Rothschild. The bidders all made offers of more than £800 million -- some of them considerably more -- to proceed to the final round.
"I think there was a competition between the IPO and the private valuation. That is true," concedes a person close to the buyer. "It was a transparent and well-run process on all the fronts."
Since that outbreak of optimism in January, the signals for private equity exits by any route have been mixed. But Pets at Home was certainly a good deal for the seller. Bridgepoint bought the company for £230 million in 2004, in a secondary buyout from 3i Group plc and mezzanine lender Intermediate Capital Group plc, with debt from Royal Bank. It invested more than £90 million of capital in the business and recapitalized the company twice, in 2005 and 2006, ensuring investors received all their money back after the second refinancing.
Under Bridgepoint's ownership, the company opened 100 additional stores, creating 1,000 jobs, more than tripled Ebitda and doubled revenue. In the year to March 2009, the most recent for which figures are available, Pets at Home achieved revenue of £404.2 million and Ebitda of £70 million. However, with KKR's buyout valued at 11.3 times trailing Ebitda, it would have been closer to £85 million by the time of the deal.
Pets at Home, which continues to open new stores under its new owners, sells high-margin pet foods and accessories as well as small animals, birds and fish (though not puppies or kittens) and in a number of outlets provides veterinary services as well as pet grooming.
All of which begs the question, at a time when some economists believe Britain is teetering on the brink of a double-dip recession: Why were private equity firms so keen on the business? Does it make sense to buy a poodle parlor in a downturn?
Neither the sellers nor the buyers have any doubt on that score. Pets at Home, they point out, is no ordinary retailer. The company has proved itself recession-resilient, achieving increased like-for-like revenue growth in every quarter under Bridgepoint's ownership. Consumers love to spoil their pets, and the last thing they will cut is spending on pets and children.
Moreover, the company is the only specialist pet accessory and pet food retailer of scale in the U.K., yet it has only a 14% share of a highly fragmented market where 74% of the pet-owning population has never set foot in one of its stores or bought its wares online. The company, says the person close to the buyer, still has years of growth ahead of it and can benefit from KKR's long experience and skills in the retail sector.
And if there were any doubt the private equity firms have got it right, the readiness of the lenders to provide 3 times Ebitda of senior debt and twice Ebitda of mezzanine should settle the matter. Nomura International plc, Calyon (the corporate and investment banking entity of Crédit Agricole SA) and in-house lender KKR Capital Markets jointly underwrote and distributed the senior debt. KKR Capital Markets also arranged and syndicated the mezzanine.
KKR may well be very ambitious, but it is not, as the English would say, barking mad.