“We are having our best year ever.”
“We can’t keep enough product in stock to satisfy demand.”
“We just had another record month.”
These are among the many quotes I hear from pet companies across all spectrums of our industry. While COVID-19 has wreaked havoc on the health and finances of many Americans, it has been a boon to the pet industry, proving once more that our wonderful industry truly is recession resistant. As always, this gets the attention of pet industry investors and buyers.
With over 25 announced pet industry transactions in the last year, M&A activity shows no indication of slowing down. Whitebridge’s acquisition of Grizzly Pet Products, BrightPet of MiracleCorp and Prairie Dog Pet acquiring Himalayan Pet Chews are just a few examples of recent activity. Our firm, BirdsEye Advisory Group, has also experienced a record year, closing three transactions since October 2020, with two more in the pipeline.
So why this continued, intense focus on pet companies?
From my perspective as a 34-year veteran of the pet industry, including 12 years as an M&A advisor focused exclusively on pet, the reasons are clear: It started with the Baby Boomers treating their pets like children, picked up further steam because Millennials are delaying having children – and thus focusing their spending on their pets – and peaking with COVID making it obvious that pets bring us the joy and unconditional love we need to get us through the extremely rough patch over the last year.
Increased activity is also as a result of the sense of urgency instilled in owners when it was announced that the Biden administration will likely increase the capital gains tax rate in the next year or so, potentially doubling it from the current max of 20 percent. Many founders/owners who are hoping to exit their business soon are pushing their timeline up to minimize the tax consequences of a sale.
Another persistent theme I have heard from both clients looking to sell and companies looking to acquire is that smaller companies are finding it hard to compete in the current environment. Per David Blatte, chairman of the board of Worldwise Corporation, escalating vendor and operating cost increases are becoming hard to pass on to their customers, resulting in a loss of profitability.
“You need scale to make it in today’s environment,” Blatte says. “For example, freight rates have more than tripled and it is still hard to secure containers. The lead times have increased substantially – so the little guys will continue to get squeezed out.”
According to Bill Broun, vice president at Nestle Purina in charge of M&A, there are a number of factors driving activity, including pent up demand coupled with the fact that the pet industry has performed extremely well in the last year.
“Companies are looking to capitalize on strong results in a robust valuation environment with tons of money, both private equity and strategic, chasing a hot category,” Broun said. When asked how long he anticipates this flurry of activity to continue, he said he thinks this will likely last at least through 2021. “I concur, and propose that it will likely last a few more years, as I see no signs of the market slowing down,” he added.
Speaking of private equity, their interest in pet is as strong as ever, according to Adam Fuchs, principal at A&M Capital Partners and board member at BrightPet Nutrition Group. “We love the macro trends in the pet industry. It is stable and growing, driven by an increased focus on pet wellness, nutrition and health that has resulted from the shift to treating our pets like family members,” Fuchs said. “We also love the current fragmentation that is creating opportunities for companies to combine forces and unlock the benefits of scale, create more jobs, and benefits for customers and shareholders.”
The question I can always count on getting when speaking with owners is “what multiples are you seeing right now?”
It depends on a variety of factors, primarily: growth rate (which doesn’t seem to be an issue for most companies right now), strength of brand, gross margins and lack of customer concentration. Also, companies that have direct-to-consumer business are realizing higher valuations than those going through the traditional brick-and-mortar channels. For consumable companies hitting on all cylinders, they can count on a range of 8 to 12 times EBITDA, with some getting even higher. Durables are slightly lower, since there isn’t the potential for recurring revenue. Multiples are definitely at the highest level I have seen in the 12 years I’ve been a pet-industry investment banker.
Carol Frank of Boulder, Colorado, is the founder of four companies in the pet industry and a managing director of BirdsEye Advisory Group, where she has advised dozens of pet companies in M&A transactions, strategy and exit planning. She is a former CPA, has an MBA, is a Certified Mergers and Acquisitions Advisory (CM&AA) and holds Series 79 and 63 licenses.