March 13, 2018 / 5:00 AM / 6 months ago

DEALTALK-Pampered pets set Wall Street on the prowl for deals

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By Harry Brumpton

March 13 (Reuters) - Gordie Spater has been manufacturing dog harnesses for nearly 15 years on the northernmost reaches of the Massachusetts shoreline, but he is in high demand right now on Wall Street.

His brand, Kurgo, occupies the sort of niche coveted by investors looking to profit from the U.S. pet economy, a range of outdoor gear and accessories for the traveling mutt.

Consumers’ increasing tendency to treat their pooches like family, along with the retail industry’s need for new products to lure people online and in store, have created a boom in deals for companies catering to pets.

Food brands, particularly those offering premium, natural ingredients, have been among the most popular acquisition targets in the pets space. But as the number of major, independent players shrinks and valuations get steeper, buyers are setting their sights further afield – at niche products such as snacks and accessories and services including grooming and doggie daycare.

"We’ve been looking in detail at opportunities in many of the categories over the past 24 months," says David Fiorentino of private equity firm J.W. Childs Associates. There has been a lot of competition among investors for buyouts, he said. "Especially companies with more than $30 million to $40 million in revenue."

So far this year, there has been at least $8.3 billion worth of transactions, involving veterinary clinics in Australia and cat snacks in the Netherlands as well as pet insurance in the United States and canine raincoats in Italy.

Buyers range from private equity firms such as KKR, as well as General Mills Inc and other consumer giants looking to expand beyond cereals and yoghurts for humans to high-protein meals for dogs and cats with sensitive stomachs.

That start to 2018 is close to the same period last year when there was the highest total value of pet-related deals in 16 years. Pet dealmaking has dipped 6 percent on last year's total value of deals while dealmaking in the wider consumer industry has slipped more than 22 percent so far this year compared to 2017, Thomson Reuters data shows.

Spater has been fielding inquiries almost every week from private equity funds and companies looking to buy Kurgo, which he founded with his brother Kitter after the latter rigged up a “backseat barrier” with some mesh and bungee cords to stop his Plott Hound Zelda from jumping out of the trunk of his car.

“Obviously, retail is a challenging space, but there’s a lot of activity in the pet specialty space,” said Spater. “I think the consolidation is definitely here.”

David Blatte, a board member of rival cat and dog accessories brand Worldwise, sees the emergence of so-called “pet parents” among Millennials and Baby Boomers creating a large, lucrative gap for health-conscious, high-end products and services.

“It’s unbelievable. This is the most white space of any consumer sector,” said Blatte, a former consumer products investment banker, who is currently looking to buy companies selling luxury pet totes and doggie-dental-enhancing chew toys.

Adding to the pressure to consolidate are the distributors, who want suppliers with scale and a wide variety of products.

“A lot of these retailers want to deal with less vendors,” said Blatte. “We do somewhere like three to four acquisitions a year, smaller pet companies and we bring them into the Worldwise umbrella.”

Among the more significant deals in the space this year was General Mills acquisition of pet food maker Blue Buffalo Pet Products Inc for about $8 billion in cash.

That price equated to around 6 times annual sales according to investment manager Susquehanna International Group, a valuation similar to the sort of multiples seen for health-oriented human foods including Kellogg Co's $600 million deal for upstart healthy snack maker RXBar and Dr Pepper Snapple Group Inc's $1.7 billion deal for drinks brand Bai.

“Valuations are steep,” said Tim Larsen, a managing director at investment bank Houlihan Lokey, which has negotiated a number of pet deals.

According to Larsen, even in the universe of private companies, many pet company acquisitions this year and last have been struck at low-to-mid-teens profit multiples. This compares to a multiple of about 10 times across the consumer industry more broadly last year, according to Thomson Reuters data.

For many acquirers, there is competitive pressure to get involved. To match consumer conglomerates Nestle, Colgate-Palmolive Co and J.M. Smucker Co, who all have pet care divisions outpacing core company sales, agricultural giant Cargill ramped up its pet food manufacturing facilities in January through the acquisition of Ohio-based Pro-Pet. The price was not disclosed.

“When you sit down with your strategic customers and you have every one of them say to you that premium pet is where they need to invest and they need you to be there with them, that’s a glaring reason to invest,” said Cargill’s Feed and Nutrition Retail Director Christi Brown.

DOG SALONS

U.S. consumer spending on premium dog and cat food – the sort of meals that combine deboned meat with garden veggies – is expected to accelerate by 16 percent in total over the next five years compared to 12.2 percent for pet food more generally, according to market research firm Euromonitor.

Spending on toys, carriers and bedding, as well as food brands for therapeutic or 'prescription' diets are also set to grow at a breezy clip of between 12.1 percent and 12.6 percent even as the total population of pets stays the same, according to Euromonitor.

With a scarcity of targets with scale, Larsen and other M&A advisors are looking at smaller deals focused on healthy foods and snacks.

“I think that there should be a wave of deals over the next one, two, three years,” he said.

Cat catering is also expected to be a growth area, along with premium services aimed at dogs, such as grooming and doggie hotels.

Dan Barton’s no-expense-spared dog salon chain Splash and Dash Groomerie, headquartered in Florida, still has only 18 franchises generating $14 million in annual revenues across the network, but receives approaches on average every few months from prospective acquirers.

“The big players have been all focused on the food industry and that’s where there have been a lot of mergers and acquisitions. Players in the service industry, there’s not many at all,” said Barton.

“My dog Mercedes is like a family member to me. Like my child,” said Barton, who sees his own preferences mirrored in younger consumers. “That is a huge market now that is just starting to become a huge industry.”

Gordie Spater agrees, and that is what is different from older generations of pet owners. His business was established trying to keep dogs stowed in the trunk of a car but in the future, people might prefer to have them travel upfront. That evolving relationship will require different types of products.

“I go into my daughter’s room this morning and even though my dog is 80 pounds he slept on the twin bed with her all night, and does most nights," said Spater.

Editing by Carmel Crimmins and Edward Tobin

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