As North West petcare retailer Pets at Home is sold for nearly £1bn, Rupert Cornford gets inside what could be the deal of the decade.
It all came down to that day; that day in
January that would have passed many
of us by. But for one company, based at
a sleepy trading estate down the A34 in
Handforth Dean, Monday 25 January would
be a turning point in its history.
The sale of petcare retailer Pets at Home to US private equity house Kohlberg Kravis Roberts (KKR) has sent shockwaves through an industry reeling from the past 18 months; an industry struggling to invest its money and wondering how to get by without bank debt. But to many people this deal, which values the business at £955m, has given confidence back to the market.
It all started in October 2009 when a decision was made to sell Pets at Home in a dual track process. Two programmes would run side by side, with two very different outcomes. Private equity backer Bridgepoint would either sell the business through an initial public offering (IPO) or a buyer would be found from private equity or trade. The stage was set, the battle plan drawn up and the timetables accounted for. Book runners at JP Morgan Cazenove would advise on the potential float and Rothschild would be charged with finding a buyer.
“We found ourselves in a position where both routes were incredibly attractive from a ‘desire to work under’ perspective and a ‘valuation’ perspective,” says Matt Davies, chief executive at Pets at Home. “We just couldn’t call which route to pursue, so we ran both.”
Andrew Thomas, managing director at Rothschild, says it was always the intention to run both options: “We were confident that institutional investors would be happy to invest in the company. We were also confident that there would be appetite for a sale. Perhaps it doesn’t sound significant, but Matt Davies had to spend a lot of time in front of investors and potential buyers.”
By the middle of December Pets at Home had attracted first-round bids valuing the company at more than £800m. Four private equity houses were invited to progress to he second round; those who priced tool low were rejected. TPG, Apax Partners, Bain Capital and KKR were each given top-up diligence, further access to management and a stark warning from the advisers: to be competitive you have to increase your bids and be ready to complete on 25 January. A decision would be made at that time whether to sell or float the business.
It went to the wire. The crunch meeting was held at Rothschild’s offices in the heart of the City on 25 January. It was 1.30pm and the IPO book runners were delivering their final verdict: yes, the market would value the business in excess of £900m. A good result, and one that Bridgepoint and management would have taken. But at the same time, email notifications started to come through from potential private equity buyers anxious to get their voices heard.
The IPO meeting finished at about 4.30pm but KKR had already made contact. Following conversations that evening, as confirmations came in from investors, it became clear that the valuation had been topped. All the bids came in well above £850m, but we all know who wanted to pay the most. It was done and dusted within 24 hours as KKR came forward with a debt package in place and pens at the ready. It might have taken six hours to get all the paperwork signed, but any potential IPO announcement as the markets opened on 26 January was dead in the water.
“The call was made on the price KKR was willing to pay; the speed at which they were willing to move; the feedback in terms of IPO pricing; and the extra risk involved by taking the IPO route,” says Davies. “But it was a close call, and as a management team we would have been delighted to be running the company under public ownership.
” Some have labelled this deal as a watershed; a return of the debt markets, a private equity house prepared to pay top dollar for a business in the same league. But what supports this argument?
KKR agreed to underwrite part of a £450m debt package with friends in Germany, France and Japan. Nomura, Calyon (the investment banking arm of Credit Agricole) and Commerzbank have all played their part to offer a package valued at 5.4 times the EBITDA of the business. This multiple is not high compared with the heady days of 2006, but the total valuation of 11.5 times earnings shows KKR’s confidence in the asset and the willingness of banks to club at this level.
It would be easy to discount the major UK lenders, however. After all, there isn’t one listed above, and for many their willingness to lend into the leveraged market remains unclear. But what is less well known, and arguably more important for the debt markets, was a process the Rothschild was running alongside the sale.
Andrew Thomas and his colleagues had set up a debt staple from a group including UK banks, in touch with the business, which had credit-approved debt facilities and agreed terms on the table. It’s common to run this kind of process for large assets because it gives the buyer and seller comfort that the market will support a certain level of equity investment for a deal. It also presents the deal in more of a gift-wrapped form, which is important in a tough market.
“You might think a company is worth a billion pounds, but no-one is going to write you a cheque for this amount,” says Thomas. “They will write one for a proportion of it, but the rest will come from the banks. For one of these larger assets, unless you really know what the debt package is going to be, you are only dealing with half the equation if you are speaking with just the equity investors.”
The same technique was used on the sale of Survitech in February, the survival equipment company in Belfast that was sold to Warburg Pincus for £280m. Approximately £120m of debt funding was raised in a debt staple including Bank of Ireland, HSBC, ING, Lloyds Banking Group, Société Générale< and UniCredit. The Pets at Home debt staple included the Royal Bank of Scotland, Lloyds Banking Group, BNP Paribas, Bank of Ireland and UniCredit, and is understood to have been in the region of £370m – 4.5 times EBITDA. That is lower than the amount KKR managed to raise. But it says that some local banks were prepared to back this business had they been called on; and that for the very best assets, the debt markets are supportive.
To put the asset in context it is worth explaining how Pets at Home got to this position. Founder Anthony Preston started the chain from a single superstore in Chester in 1991. He had made several observations about the buying habits of the nation’s pet owners while working in the family cash and carry business and when acquiring R&B Pet Supplies in 1984: people weren’t visiting traditional pet shops and supermarkets weren’t offering much of a range for pet owners. He also clocked the rise of the supersheds and a trend for out-of-town retail parks across the UK.
By 1995, the company had 25 stores and attracted private equity investment from 3i, which supported its acquisition of PetsMart so Pets at Home could become a market leader. Sales continued to grow and the business rocketed in value from £20m in 1997 to upwards of £200m seven years later. After attracting bids from 14 private equity houses, Pets at Home was sold to Bridgepoint in 2004 in a deal worth £230m. The business now has 250 stores with sales of more than £400m in 2009 and an EBITDA of £70.3m. That is due to reach £83m in the current financial year.
Pets at Home is relatively unique. It has continuously added stores and grown profit, and hasn’t suffered any negative like-for-like reporting in the past two years. For many there is little negative about the business, which is why it stood up so well to a dual-track sale process and fetched a high price.
“KKR has paid the price it has because they love the business and the team, and it’s a question of working with us to make the company even greater,” says Davies. “They paid a good price for a good business. Bridgepoint paid £230m in 2004 and people thought they paid too much. If people think KKR has paid too much now, they should reserve their opinion for five years’ time.”
John Hughes, head of private equity at KPMG, adds: “It wouldn’t surprise me if KKR sold the business for £1.5bn in five years. It would certainly stand up to the scrutiny of a large private equity house or the market.”
KKR has only been on board for a matter of weeks but all eyes will be on a five-year business plan to maximise the investment and keep the expansion on track. Davies says the only focus at the moment is to take Pets at Home to more people. Based on a planned expansion of 25 stores a year, he believes there is scope to open another 200 to 250 stores across the UK, which equates to another eight to ten years of growth.
With KKR comes a lot of retail experience with companies including Alliance Boots, Toys R Us and Dollar General in the US – projects Davies is keen to learn from. “Pets at Home has been the greater part of my professional career,” says Davies. “Whether as an adviser to Anthony Preston when he had 30 stores, to finance director in 2001 and chief executive in 2004, there is nothing I would rather be doing with my life.”
With a multimillion-pound stake in the company, we would have to agree.
Also in: March 2010
-
Lessons learned
We have maintained a cautious optimism for the past 18 months, believing that business in the North West would prove to be more resilient and innovative than much of the media gave it credit for.
-
Interview - Chris Morris
Is this a career-defining moment? Rupert Cornford meets the man at the helm of internet success Laterooms.com.