Petco to Go Private in $469-Million Deal

Petco Animal Supplies Inc., its stock price lagging its improved performance even in the face of fierce competition, agreed Wednesday to go private by being acquired by an investor group for $469 million in cash.

The San Diego-based chain, with 503 stores in 39 states, would be bought for $22 a share by a group led by Leonard Green & Partners of Los Angeles and Texas Pacific Group, based in Fort Worth. They also would assume Petco’s debt, lifting the transaction’s total value to about $600 million.

Petco has been waging war not only with its larger rival, Petsmart Inc., and scores of smaller independent retailers but also with low-price, mass-merchant giants such as Wal-Mart Stores Inc. that have increasingly been selling dog and cat foods and other pet supplies.

After struggling in the late 1990s, Petco had shown signs of improvement in advance of the buyout announcement. In fact, in tandem with the announcement, Petco reported its best-ever sales and profit for its fiscal first quarter ended April 30, and said operating earnings in the quarter--excluding one-time gains and charges--surged 53% from a year earlier.

The company also said its “same-store sales”--those of stores open at least a year, and retailing’s main gauge of success--rose a stout 8.5% in the quarter from a year earlier, after an 11% same-store sales gain for all of 1999.

Yet Wall Street has largely ignored the company’s gains--the stock sells for a modest 11 times Petco’s expected earnings per share for the current fiscal year--and so a frustrated Petco agreed to the deal with the investor group.

“This [deal] is just a case of an undervalued stock” relative to the company’s operating gains, said James Myers, Petco’s chief financial officer. “We’ve been putting up some great numbers and not getting rewarded by the public markets.”

And there’s speculation that many more Petco-like deals are coming, as private buyout firms seek undervalued stocks left behind by investors chasing big gains in other areas such as technology.

The Petco buyout was announced after financial markets closed, and the purchase price represents a sizable premium over Petco’s close Wednesday of $14.94 a share, up 25 cents for the session. But Petco’s stock was trading over $30 a share less than three years ago.

To be sure, Petco’s own missteps contributed to its earlier problems. In the 1990s it rushed to acquire several smaller pet-supplies stores and convert and expand many of its own outlets to “superstores.”

But problems digesting those changes often forced Petco to slash prices to move old inventory and raised costs, which in turn ate into Petco’s earnings and more than once left its profit short of Wall Street’s expectations.

Under the merger pact, Petco Chairman Brian Devine and other senior executives will keep their jobs and retain a minority equity stake in the company. The deal is expected to be completed this fall.

In its fiscal first quarter, Petco said, its net income rose to $6.4 million, or 30 cents per diluted share, from $3.6 million, or 17 cents, a year earlier. Sales climbed 15% to $265 million from $230 million.