Forbes - PetSmart's SPAC ambitions

Kevin Dowd

Staff Writer

January 23, 2022

Big Things

Happy Sunday, readers! Before we dive into this week's recap, a bit of newsletter news:

Starting today, Deal Flow will now publish twice a week, and it will be completely free to subscribe. If you've been receiving these free Sunday editions, you don't need to do anything different or sign up for anything extra. You can just expect to receive twice as many newsletters, starting with another edition tomorrow afternoon to recap all the activity from Merger Monday. That's pretty good, right?

We'll have some more changes to announce in the next couple of weeks. I'm really excited for what's next, and I'm really excited to have you all right there with me as we move into the next phase of this little newsletter experiment.

But enough of all that. Let's move onto the real reasons why you opened up this email: to read about puppies and SPACs.

1. A deal for the dogs

Pet ownership has never been more popular. Nearly one in five Americans acquired a new pet during the pandemic, according to the ASPCA. And caring for all those new furry friends isn’t cheap. They need food. Toys. Leashes. They need training and daycare and healthcare. As many have learned over the past two years, caring for an animal doesn’t come cheap.

All of which is why PetSmart thinks the time might be right to go public. Boasting a bigger potential client base than ever before, the pet-store powerhouse is in talks to combine with a SPAC sponsored by KKR, according to a Blomberg report this week, with the potential to reach an enterprise valuation of $14 billion if a deal does materialize. That’s a healthy premium to the $8.8 billion price tag that BC Partners paid for PetSmart in a take-private buyout back in 2015.

But a question looms over PetSmart’s potential plans: Did it wait too long for a return to the public market?

PetSmart could aim to capitalize on a pandemic-era craze for cute critters. Getty Images

PetSmart is a 35-year-old company that’s well known for its pet-care superstores. Over the past decade, though, as online shopping has come to dominate more and more of the retail sector, a business based on superstores has grown a bit less appealing. So, in 2017, BC Partners and PetSmart decided to diversify by acquiring online pet-care specialist Chewy for $3.35 billion, marking what at the time was the largest acquisition ever of an ecommerce brand.

It quickly became clear that the deal was a home run. Chewy’s revenue surged, and it conducted an IPO about two years later, reaching a valuation of nearly $9 billion. Its shares climbed some 60% in their first day alone, taking that figure north of $14 billion.

Less than a year later, the pandemic began. The business of selling pet products online was already an appealing one; suddenly, it became a model that investors couldn’t ignore. Between March 2020 and February 2021, Chewy’s stock price climbed more than 350%, and its market cap soared to nearly $50 billion.

But as the lockdowns and store closures of the early pandemic waned, the market began to shift. Investors realized they might have gotten out over their skis. Over the past 12 months, Chewy’s stock has fallen nearly 70%, down to $38.05 per share as of this writing. Along with names like Peloton and Netflix, it serves as a prime example of the ongoing correction in certain pandemic-fueled stocks, as some of the trends that caused these companies’ businesses to surge during 2020 show signs of retrenchment.

It’s not like Chewy is in any trouble. But it’s no longer one of the hottest companies in the world.

And that fact surely has some implications for PetSmart and its potential SPAC deal. A $14 billion valuation would certainly represent a solid multiple for the company and its private equity owner. But based on the way Chewy’s valuation has soared and then plunged, it’s tough not to think that PetSmart might have fetched a much higher price had it been planning a merger this time last year.

I’m not privy to all the machinations going on in the Phoenix-based company’s board room. PetSmart’s executives surely have their reasons, and a combination with the KKR-backed SPAC—which raised nearly $1.4 billion in an IPO last year—could have plenty of appeal. Timing isn’t everything. But the whole affair is a reminder that, when it comes to making a public debut or lining up a different kind of exit, it can certainly be a multibillion-dollar thing.

Just something to chew on.

2. The Activision acquisition

It was the biggest deal announced this week. Eleven-and-a-half months from now, it would be no surprise if it's also the biggest deal announced all year. Microsoft revealed plans on Tuesday to buy Activision Blizzard for $68.7 billion in cash, marking an enormous bet by the Seattle-area tech giant that video games will be a major area of growth in the years to come. The deal will add franchises such as "Call of Duty," "World of Warcraft" and "Candy Crush" to a portfolio that already features "Minecraft" and "Fallout," turning Microsoft into the third-largest video game company in the world in terms of revenue (trailing Sony and Tencent). It will also allow Microsoft to add premium new content to its Xbox Game Pass platform, a sort of Netflix for video games.

Assuming it passes regulatory muster—which might be no sure thing—the takeover will shake up the video game industry, removing one more independent publisher and further consolidating power in the hands of a tech titan. The move already shook up one of Microsoft's rivals: Stock in Sony plunged more than 10% this week after the Activision purchase was announced. It's Microsoft's largest acquisition ever. And it's also the largest acquisition in the history of video games, surpassing Take-Two Interactive and its plans to buy mobile game specialist Zynga in a $12.7 billion deal that was unveiled just last week.

3. Unilever's jumbo rejections

It briefly appeared that Unilever's pursuit of GSK Consumer Health might be the next big M&A saga. GlaxoSmithKline announced several days ago that it had received and rejected three different takeover offers from the British consumer goods powerhouse, with the latest bid valuing the business at £50 billion (about $68 billion). Nonetheless, Unilever said it was still interested. But the company walked that back later in the week, announcing on Wednesday that it won't increase its offer, which would seem to put the whole situation to rest.

If Unilever had been able to win a deal, it would have brought brands such as Advil, Aquafresh and Tums under a corporate umbrella that already houses Dove soap, Ben & Jerry's ice cream and more than 20 other brands. GSK Consumer Health was formed as a joint venture with Pfizer, with GSK owning 68% and its rival controlling the remainder. With Unilever out of the picture, GSK Consumer Health will proceed with previously announced plans to spin out as a standalone public company sometime this year.

4. The next big PE fund

We led off last Sunday's newsletter with a look at the many mega-funds that are currently being raised by private equity firms in the U.S. The trend carries over onto the other side of the Atlantic Ocean, too.

EQT announced this week that it has set a target of €20 billion (about $22.7 billion) for its next flagship buyout fund, its 10th. That would easily exceed the firm's previous flagship vehicle, which closed on €15.6 billion a mere nine months ago, reflecting the serious demand among LPs for exposure to big-ticket buyout funds. Another mega-fund could also be en route to Europe, as Bloomberg reported that The Carlyle Group has set a target of €7.5 billion for its next pool of capital focused on the region. Carlyle is also making progress on its next flagship fund: The firm expects to have raised $17 billion toward a $22 billion goal by the middle of this year, once again per Bloomberg, down from a $27 billion target that had previously been reported.

5. The next big PE IPO

Just one week after TPG completed the year's first major IPO from a private equity firm, we have news about an even bigger listing that's on the way.

CVC Capital Partners has hired bankers to prepare an IPO in London for sometime in the second half of this year, with hopes of reaching a valuation of more than $20 billion, per a Bloomberg report. CVC is one of the biggest and oldest private equity firms in Europe, with $122 billion in assets under management across its various equity and credit platforms. That valuation target is more than twice as high as the initial $9 billion market cap that TPG established with its IPO earlier this month—a sign, perhaps, of just how attractive CVC's credit and direct lending arms might be to public investors. The aforementioned EQT was the last European private equity firm of a similar scope to go public, doing so in September 2019. Since then, the firm's stock price has risen more than 350%, taking EQT's market cap north of $40 billion.

6. Singapore's SPACs

Nearly a year after the peak of the original blank-check bonanza in the U.S., the SPAC has officially arrived in Singapore. A vehicle called Vertex Technology Acquisition Corp. began trading on the Singapore Exchange this Thursday, becoming the first SPAC to conduct a public offering in the city-state. One day later, a second SPAC began trading, called Pegasus Asia. And a third SPAC, dubbed Novo Tellus Alpha Acquisition, is expected to conduct an IPO of its own next week.

Vertex's debut was a very modest success: Its stock opened for business at S$5 per share and closed its first day of trading at S$5.05. Pegasus Asia experienced an even smaller first-day pop, jumping from S$5 to S$5.02. But those numbers don't matter all that much. The main takeaway from this week's expansion into Singapore is that the SPAC is here to stay as another option for companies seeking to go public. The market might never again reach the craziness of January 2021, but it also isn't going to vanish entirely—and there could be room for more growth in other international financial centers.

Is Singapore the next SPAC hot spot? Getty Images

7. An elementary exit

IBM announced a long-awaited deal on Friday to sell part of its IBM Watson Health unit to Francisco Partners, breaking up a major bet on healthcare technology that never quite lived up to Big Blue's expectations. No price was announced, but the assets on the move are worth a bit more than $1 billion, per a Bloomberg report. That's a far cry from the $4 billion that IBM previously spent on acquisitions to build out Watson Health. And it marks a retreat from a healthcare data sector that other companies and investors have been pouring billions of dollars into amid the pandemic.

For Francisco Partners, this is the latest notable example of carving out a software business from a much bigger conglomerate. Last year, the firm teamed up with TPG to buy Boomi from Dell Technologies, paying $4 billion in cash for the provider of cloud integration software. And last January, a little over a year ago, Francisco Partners closed its $1.1 billion takeover of the Forcepoint cybersecurity business, which was previously owned by Raytheon.

8. Music rights get meta

Buying and selling the rights to classic songs has turned into a multibillion-dollar business over the past couple of years, with artists like Bruce Springsteen, Bob Dylan and Stevie Nicks all striking deals to sell their catalogs to private equity firms and other strategic investors. Now, a major behind-the-scenes player that helped facilitate many of those sales has done a deal of its own.

Massarsky Consulting is the go-to firm for providing valuations for song catalogs, with its work fueling more than $6.5 billion in transactions last year. This month, Massarsky sold itself to Citrin Cooperman, a professional services firm. No price was announced, but this sure seems like a textbook example of selling high—particularly when the target is a company that is so very concerned with valuations. Anne Steele of The Wall Street Journal had a great interview this week with firm leaders Barry Massarsky and Nari Matsuura about their latest deal and how it fits into a very interesting past two years.

9. SPACs on, SPACs off

A SPAC deal is on for ProKidney, a maker of technology for treating chronic kidney disease, which announced plans to conduct a blank-check merger this week at a $2.6 billion acquisition. The move made plenty of headlines, but many of them were not for the reasons the company would have liked: ProKidney is merging with a SPAC backed by Chamath Palihapitiya and his Social Capital, and the news was announced one day after Palihapitiya made a podcast appearance in which he declared that "nobody cares" about the widespread human rights abuses of the Uyghur people in China.

And a SPAC deal is off for Acorns, the retail trading platform that pitches itself as a way to invest spare change and other small amounts of money. Acorns walked away from a previous agreement to combine with a vehicle called Pioneer Merger Corp. at a $2.2 billion valuation, citing market conditions. Acorns chief executive Noah Kerner told Bloomberg that the company now plans to raise a new round of private capital and eventually pursue a traditional IPO, instead.

Things To Read

Leon Black filed a lawsuit this week accusing fellow Apollo Global Management cofounder Josh Harris of attempting a "coup and smear campaign" to oust Black from power, the latest major development in a very messy saga. [Financial Times]

A generational IPO looms for the Life Insurance Corp. of India, which claims more than 100,000 employees. It seems like just about all of them are working around the clock to make sure the listing is a success. [Bloomberg]

As the race for startup investments in Silicon Valley gets crazier and crazier, the startups and investors at the center of the frenzy continue to believe it's all very sane. [The New York Times]

These days, more and more mega-funds dot the private equity landscape. But are they the best place for LPs to find standout returns? [PitchBook]

Investors are unsure what regulators will think of Microsoft's plans to buy Activision Blizzard. For hedge funds in the business of merger arbitrage, that uncertainty creates the potential for tantalizing returns. [Reuters]

The scientific tools used to learn from volcanoes have improved massively since the world's last major eruption. Last weekend's devastating explosion in Tonga is putting them to the test. [Wired]

A profile of Joss Whedon, the onetime king of geek culture who's still trying to grapple with the decisions and actions that lost him his throne. [Vulture]

Quote Of The Week

"It seems to us that Unilever management's response to its poor performance has been to utter meaningless platitudes to which it has now attempted to add major M&A activity. What could possibly go wrong?"

-Terry Smith and Julian Robins of Fundsmith, which owns a significant stake in Unilever, writing in an at-times snarky letter to shareholders about why they are pleased that Unilever's bid for GSK Consumer Health seems to have collapsed

Kevin Dowd

Staff Writer

I am a staff writer at Forbes. I previously wrote for PitchBook, where I created The Weekend Pitch, a weekly newsletter about the private markets. Before that, I covered high school sports in the Pacific Northwest, and I graduated from the University of Washington with a degree in journalism and creative writing. I live in Seattle, where I read a lot of books and play a lot of golf.

Follow me on Twitter.

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