In the typical retail horror story, Amazon lurks behind the door wielding the metaphorical chainsaw.
But in the case of pet goods in 2016, it was fast-growing, online-focused Chewy that bit into the revenue of market leader PetSmart. So PetSmart, backed by BC Partners, took on debt to acquire the newfangled threat for $3.3 billion in 2017—ostensibly to galvanize its own digital transformation.
But now, as both companies are getting a boost from avid pet lovers, BC Partners is splitting the duo up. The move will result in a lower debt-to-income ratio for PetSmart (as Chewy is unprofitable), with BC Partners planning to recapitalize PetSmart with $1.3 billion in equity. BC also plans to raise $4.7 billion or so in debt from investors for the 34-year-old chain. Shares of Chewy, meanwhile, will be transferred to a BC Partners-led group. Moody’s upgraded PetSmart’s credit rating this week on the news.
Sure, hindsight is 20/20, but signs of a potential split were littered through the past few years. Just read my colleague Phil Wahba’s excellent May feature on the battle for the pet market.
Despite the 2017 tie-up, the two businesses have remained separate aside from the cross-selling of some products, with some in the industry viewing the acquisition as “less of an e-commerce strategy and more of a financial-management tactic,” per the feature. By staying separate, Chewy was able to command a higher e-commerce valuation at its IPO rather than get bogged down by brick-and-mortar numbers. That IPO, in turn, helped PetSmart pay off some of its sizable debt load.
In strategy, too, the two have diverged. While e-commerce has been the buzzword of the last decade, market leader PetSmart has been able to bring its sales decline to a “near-halt” by focusing on in-person services like veterinary care, doggy day care, and grooming, with just 4% of its sales coming from online. But Chewy has continued to lean into the e-commerce trend—beating even Amazon in sales of pet goods in 2019.
Meanwhile, competitor Petco, backed by CVC Capital Partners and the Canada Pension Plan Investment Board, is barking after a sale or public offering.
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