The first half of 2020 was a boom time for pet adoptions, as animal-loversemptied shelters during the COVID-19 lockdowns.
Like their four-legged consumers, a number of companies serving the pet markethave also been scooped up in recent months—in their case, by private equityinvestors hoping to capitalize on a growing industry expected to withstand aneconomic downturn.
The early innings of the COVID-19 outbreak in the U.S. saw a marked slowdownin mergers and acquisitions activity. Still, TSG Consumer Partners announcedon April 3 it had acquired a majority stake in Pathway Vet Alliance, an ownerand operator of more than 270 veterinary hospitals throughout the U.S., fromMorgan Stanley Partners.
A month later, TSG said that it would sell its minority stake in Radio SystemsCorporation as part of the company’s sale to Clayton, Dubilier & Rice, alsoknown as CD&R. Headquartered in Knoxville, Tennessee, Radio Systems focuses onthe pet health and safety market. The company designs and distributes morethan 2,000 products under brands such as Invisible Fence, and employs morethan 800 people. TSG first invested in Radio Systems in 2006 before exiting in2012. TSG provided additional capital in 2016.
Terms of these deals were not disclosed.
CD&R Partner Kenneth Giuriceo pointed to the pet industry’s allure in a May 12press release announcing the acquisition. “The market for pet care is largeand growing with attractive long-term secular tailwinds and demonstratedrecession-resilience,” he said.
Pet-focused businesses have attracted deal-makers’ interest for years, andprivate equity investors say the recent crisis has accelerated trends thatwere already underway.
Owners increasingly view pets as part of their family, a phenomenon that PeterHaabestad, a managing partner at Guardian Capital Partners, refers to as the“humanization of pets.” Owners today are attuned to the diet, health care andexercise needs of their animals, which now play a prominent role in thehousehold.
“In recent years, everyone puts their pet in their holiday card,” Haabestadsays. “What that says to me is, pets are part of the family. They truly are.”
Guardian Capital had been watching the humanization trend for several yearsbefore investing in Hyper Pet, a maker of pet toys and accessories, in 2016.The private equity firm also saw an opportunity within the pet industry to adde-commerce capabilities and expand sales beyond brick-and-mortar retail.
The platform business, now called Cosmic Pet, has since made four major add-onacquisitions, plus several product acquisitions. The four add-ons brought newnatural toys and treats to Cosmic Pet’s product lineup and helped the companyexpand its offerings for cats.
The company has benefited from pet owners’ willingness to shell out for theiranimals. Total spending on pets in the U.S. reached $95.7 billion in 2019, upfrom $90.5 billion a year earlier, according to the American Pet ProductsAssociation, which looked at expenses including food and treats, medicine andveterinary care, and other products and services.
Cosmic Pet made its fourth acquisition in July 2019 when it bought Pet Fusion,a business that sold entirely through e-commerce channels. Just three and ahalf years earlier, Cosmic Pet had no online sales. Today, the Pet Fusion teamleads the e-commerce strategy across the platform and has achieved double-digit growth rates for Cosmic Pet’s brands through sales on Amazon, one of thecompany’s largest customers, according to Haabestad. It continues to sellthrough brick-and-mortar retailers as well.
Cosmic Pet’s addition of e-commerce capabilities through acquisition echoesthe strategy of another PE-backed business, PetSmart, which bought online pet-products retailer Chewy for $3.35 billion in April 2017—the largest e-commercedeal ever at the time, and one that was met with skepticism from marketwatchers.
The bet ultimately paid off for PetSmart’s owner BC Partners, according toreporting from the Wall Street Journal. The private equity firm is creditedwith helping to turn around PetSmart and positioning Chewy for its successfulIPO in June 2019.
Spending on pets has proven resilient during the pandemic, even amid record-high unemployment and a cratering economy. Chewy reported net sales of $1.62billion for its first fiscal quarter, ending May 3, representing a 46% year-over-year increase.
Cosmic Pet’s sales have remained strong, too, according to Haabestad. Ownersare now spending more time at home with pets and likely to notice leashes andcollars that are wearing out, or to add new toys to their collection whilethey’re stuck at home, he says.
Plus, pets still need to eat. Their owners have shown they’re willing to payfor higher quality food, and investors have taken note.
In June, private investment firm Kinderhook Industries announced that it hadacquired Prairie Dog Pet Products, a specialty manufacturer of premium pettreats and antlers, based in Grand Prairie, Texas. According to its website,the company’s products use meats, poultry and fish that are “100% pure, farm-raised, and made in the USA.”
Pet companies in the U.S. aren’t the only ones to draw PE dollars in recentmonths. Petlove, a Brazil-based online pet shop serving the country’s localmarket, announced on June 18 that L Catterton’s Latin America fund invested inthe business, underscoring the industry’s potential for global growth.
For its part, Cosmic Pet is actively pursuing new add-on opportunities,according to Haabestad.
The company faced its share of issues during 2020, due to supply chaindisruptions and store closures for its retail partners. But despite theinterruptions, Cosmic Pet saw sales climb, thanks to devoted pet owners whocontinue to fill their online shopping carts.
“We should beat last year’s numbers handily, year over year, even though we’rein the middle of a global pandemic,” Haabestad says. “It is very strong in thepet industry.”
Source: Kathryn Mulligan – Middle Market Growth
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