M&A Alert—April 18, 2017
PetSmart agrees to acquire pet product ecommerce company Chewy for $3.35 billion.
Author: Steve Payne & John Ascher-Roberts
Transaction Size: $3.35B
Chewy is an online website that specializes in selling dog and cat food, treats, and supplies via subscription to customers primarily in the U.S. Through a Chewy member’s subscription, deliveries can be set to be automatically sent depending on the frequency of a customer’s needs. Chewy has attracted over 3 million customers. Its competitors include Amazon, Petco, Petfoodirect, Petflow and Zooplus.
Ryan Cohen, CEO, and Michael Day, CTO, co-founded the Dania Beach, Florida-based company in 2011. The company received $236 million in funding from investors including CDIB Capital, Greenspring Associates (John Avirett), T. Rowe Price and Volition Capital (Jake Colognesi, Lawrence Cheng). Chewy has over 3,000 employees and was on pace to do $880 million in revenue in 2016, according to Bloomberg.
PetSmart is a specialty retailer of products, services, and solutions for pets with brick & mortar stores in the United States, Puerto Rico, and Canada. The company offers consumables, such as pet food, treats, and litter; and hardgoods, which include pet supplies and other goods comprising collars, leashes, health care supplies, grooming and beauty aids, toys, apparel, and pet beds and carriers, as well as aquariums and habitats, accessories and décor. It is one of the largest pet stores in North America with over 1,500 stores. PetSmart was acquired by a collection of investors led by the private equity firm BC Partners in December of 2014 for $8.7 billion (1.3x LTM revenue), which was a 39% premium to its public stock price at the time.
PetSmart is acquiring Chewy for $3.35B, according to Recode.
Transaction Value: $3.53B
TV / LTM Revenue 3.8x
TV / Invested Capital 14.2x
Comparable transactions include Amazon’s acquisition of Souq.com in March of 2017 for $650mm (1.5x invested capital), Walmart’s acquisition of Jet.com in August of 2016 for $3.3B (6.6x LTM revenue), Unilever’s acquisition of Dollar Shave Club in July of 2016 for $1.1B (6.6x LTM revenue) and Amazon’s acquisition of Quidsi for $545mm (1.8x revenue run rate).
Although the price would give many acquirers pause, this could end up being a shrewd move for PetSmart and its investors. According to a recent Hayden Capital report, Chewy was by far the leader in the U.S. online market share of pet products with 51% of the total online sales. While Amazon had a respectable 35% market share, PetSmart and Petco had only a measly 2% and 3%, respectively. Much like what Walmart was hoping to do with its Jet.com purchase, this acquisition can immediately bolster PetSmart’s online presence while fending off Amazon as the estimated $69.4 billion of U.S. pet spend in 2017 moves increasingly online.
Architect Partners’ Observations
This acquisition represents the largest VC-backed ecommerce deal ever, surpassing Walmart’s purchase of Jet.com for $3.3B last year and Naspers’ acquisition of Avito for $2.7B in 2015. These deals highlight the efforts of traditional brick-and-mortar retail chains to build their digital channels, especially in areas that lend themselves to automated refill like CPG. However, at the same time, Amazon has been trying to block these efforts having had made 3 ecommerce acquisitions of at least $500 million in the past 8 years (Souq.com, Quidsi and Zappos).
Also of note is that PetSmart is paying 3.8x LTM revenues for Chewy, while PetSmart itself was acquired for only 1.3x LTM revenues over two years ago. This demonstrates the expected future value of online channels. This transaction is also significant in that a brick-and-mortar market leader is paying 38.5% of its 2014 value to take the lead in online.
And a historical note going back almost 20 years: in pre-bubble 1999, there were at least four competing online pet stores. Pets.com flew the highest – it IPO’d in 2000 at $14 per share and had a peak market cap of over $300 million, all on revenues of just $619,000! Nine months later it was out of business, having spent $11 million on a Super Bowl ad featuring their famous sock puppet. Interestingly, Amazon owned 30 percent of the company.