The Power of Pets - Industry Acquisition Trends

There are few industries that expand regardless of economic cycles, but one such industry in current times seems to be the pet industry. In fact, total U.S. pet industry expenditures increased by 60% from 2001-2009. This was during a period when volatility was prevalent across many industries. Most analysts will hail the pet industry as either recession proof, or recession resistant. Regardless of your preferred definition, the fact remains that the pet industry is strong, and will continue to be so.

The pet industry is a notable segment of the U.S. economy. According to the 2009-2010 National Pet Owners Survey, 62% of U.S. households own a pet. The percentage of households with pets is expected to increase, as "baby-boomers" replace children with pets. The high rate of pet ownership, coupled with the growing trend towards pet humanization, which generally results in indulgent spending, almost assures steady industry-wide earnings growth well into the future.

Food is the highest grossing segment in the pet industry. The pet food recalls overshadowed the industry in 2007. This in turn compelled the Food and Drug Administration to create a Reportable Food Registry, which requires pet food companies to report occasions in which food has been tainted. There were a number of other recalls during the last two years as well, although these were on a relatively smaller scale.

As a result, product safety will be of the utmost importance to consumers for years to come. Interestingly, the term "natural" conjures up thoughts of safe and pure. As pet owners become more health conscious in order to improve their own quality of life, they are expected to become more inclined to closely monitor their pet's well being. According to Packaged Facts, the organic pet food segment's double-digit sales gains are expected to continue.

Although the economy is improving, business owners should still expect consumers in the short-term to be cognizant of the economy, and, as a result, look for value when purchasing pet products. It will be incumbent on companies to market products that are perceived as value enhancing.

Our research indicates that interest on the part of financial sponsors and strategic investors across all pet segments is elevated, especially now that confidence about the economy seems to be headed toward restoration. Recent acquisition activity provides a basis for this thesis. In addition to the deals listed below, we are aware of many private equity funds that are actively searching for acquisition opportunities across all pet segments, some of which include natural pet treats, holistic pet food, thermal pet products, branded pet products, and non-food pet products.

Below are some recent transactions:

• Procter & Gamble Company acquired Natura Pet Products, Inc., a Davis, CA private pet food business


• A subsidiary of Imperial Capital Group Ltd., a Canadian private equity fund, acquired Petra Pet, Inc. and Petra Vet, LLC, (also know as Beefeaters) a North Bergen, NJ developer, marketer, and distributor of dog treats and supplements


• Earthwhile Endeavors, a San Francisco, CA manufacturer of grooming products, acquired the SheaPet line of skin and coat care products from Scout Enterprises of Santa Cruz, CA


• Zuke's, a Durango, CO manufacturer of all natural pet treats, received an investment from Encore Consumer Capital, a San Francisco, CA private equity fund


• VCA Antech, a Los Angeles, CA operator of veterinary hospitals and veterinary clinical laboratories, and marketer and distributor of premium and therapeutic pet foods, signed a merger agreement with Pet DRx, a Brentwood, TN operator of animal hospitals

With the economy showing signs of life, now may be the time that business owners in the pet industry contemplate sale. Companies that have appealing product niche, or have a blue chip distribution and customer base, are attractive to investors. Companies with these characteristics, alongside earnings growth, are highly sought after.

The overall environment is ripe with opportunity for sellers, primarily for three reasons. First, private equity funds are infused with cash, and they are in need of finding investment opportunities because of expiring time horizons. Second, the capital gains tax is expected to increase at the start of 2011, eventually reaching around 25%. Lastly, at this point the number of investors looking for opportunities exceeds that of available companies for sale. However, this phenomenon is expected to exhibit signs of reversal in the next few years, as "baby boomers" are expected to crowd the market, and the number of companies for sale will exceed the number of investors looking for opportunities, which may ultimately have an adverse effect on value.

Scott Sims, M&A Analyst
DouglasGroup.net

Douglas Group has authored:
"Ripe: Harvesting The Value of Your Business"
"Cashing In! Selling Your Company for Maximum Price"

Sources:
http://www.americanpetproducts.org/press_industrytrends.asp
http://www.petfoodindustry.com/Columns/Market_Report/4163.html