Financiers & analysts sound off on animal nutrition

Financiers & analysts sound off on animal nutrition

Nutrition industry analysts and investors share their thoughts on finance in the pet sector.

NBJ: Are financial investors interested in the animal nutrition space? What would need to happen to foster more interest in this market?

Rodney Clark, Cannacord Genuity: There appears to have been a very high interest in the animal nutrition space over the past 12 to 18 months from all groups, especially private equity. We have had a number of private equity firms say they are looking at opportunities and wish there were more to evaluate. It is attractive as this is an area that has good underlying fundamentals (dollar spending on animals, particularly dogs is stable and growing) and the innovation has caught people’s attention—e.g. functional dog treats with glucosamine. More interest would be fostered by more innovation within the category.

Jonathan Marlow, MidOcean Partners: The interest mostly has been centered around natural & organic pet food, and, to a lesser extent, pet supplements and natural & organic pet supplies. However, I think the pet supplements area is in the early days, and that interest is likely to continue to develop.

Janica Lane, PCG Advisors: Transaction volume in the United States and Canada has been particularly strong, though there have been several major transactions in Europe and Asia as well. I believe the pet industry is where the food industry was, say, 10 years ago. The industry is fragmented, which is leading to buyer interest and consolidation. One area of opportunity that hasn’t been completely realized is that of pet supplements. This seems like an area where there are still consolidation opportunities. SmartPak Equine, which makes equine supplements, is one of the few pet supplement businesses that has received investment.

Rob Hill, J.H. Chapman Group: Consumer demand is very strong, particularly for what they perceive as healthy and natural & organic. Channels are not limited to specialty retail, as the big box operators (Petsmart, Petco) have introduced multiple offerings. Walmart has followed. Brand extension is clearly visible in grocery as well. The same natural & organic pricing dynamics appear to prevail—premium prices at retail. The trade uses the words “Human Analog” to describe highly desirable product characteristics.

NBJ: Who’s showing interest?

JL: Nearly every consumer-oriented private equity firm owns a pet-related company.

RH: Private equity is beginning to consider exit strategies and assume that large strategics will be the buyers. Seller value expectations are based on revenue, not EBITDA. Portfolio companies have been charged with growing market share at the expense of earnings. One can fi nd suitable gross profit margins, but EBITDA margins are generally lacking in the more attractive industry participants.

NBJ: Any notable deals or financial events in the last two years?

JM: Some notable example deals over the last two to three years in the sector would be Nestlé’s acquisition of Waggin’ Train (September 2010), P&G’s acquisition of Natura Pet Products (May 2010), and Berwind’s acquisition of Wellness/Old Mother Hubbard (August 2008). As further evidence of interest in the space, several private equity fi rms have current active investments within the sector, including TSG Consumer Partners’ interest in Dogswell, VMG Partners’ stake in Natural Balance, Catterton Partners’ stake in Nature’s Variety, and MidOcean Partners’ investment in Freshpet.

JL: VMG’s sale of Waggin’ Train to Nestle at a reported 2.3x revenue in late 2010. This is an example of the strategic interest and strong valuations that a great brand and product can bring. While VMG and the Waggin’ Train team had significantly grown the business since the time of VMG’s original investment, I believe Nestle saw signifi cant upside through greater distribution, both in the United States and internationally.

NBJ: How can an animal nutrition company make itself more attractive to a buyer or investor? What characteristics make for a good purchase?

RC: Companies that have a defensible market position are often the most attractive. This can be achieved through technology, ingredients, unique distribution, or product innovation. Coupled with this should be strong, consistent growth and profitability. Companies that understand how their brands connect with the consumer and can show that through average weekly sales at accounts are typically the winners. Just chasing new doors and channels is no longer as attractive to investors if a core business is not built that is evidenced by solid product turnover.

JM: Some attractive characteristics of a potential target could include strong historical sales growth and momentum; good brand recognition, with strong consumer loyalty and high repeat purchase rates by consumers; reasonable scale, with a good base of ACV distribution, but with room for growth; differentiated products and/or branding positioning, with an identifi able value proposition; and strong palatability of the product for pets (i.e., both the consumer and their pet love the product).

JL: Supply chain and ingredient integrity; strong product and/or brand; consistent growth and fi nancial results; science; differentiation (what is the company’s reason for being?); and a strong management team.

RH: Go beyond the current market share battle which generates revenue but consumes profi ts. Deliver sustainable market share with 40%-plus gross profit and solid bottom line cash flow. Generate revenue at specialty pet, big box pet and mass merchandisers with no particular concentration.

NBJ: What do the multiples look like?

RC: In general, the multiples are the same as in many other branded CPG areas, but are very company-specific.

JM: For attractive targets, purchase multiples in the space have been robust, potentially matching or even exceeding those in the human supplement industry (depending on the subsector being compared). While valuations in the pet sector in general tend to be above average due to the attractiveness and interest levels of the industry overall (and the scarcity of scale assets available for purchase), I believe targets focused on natural/organic pet food will continue to receive interest in the near term and potentially earn greater valuations than conventional pet food businesses.

JL: Multiples are hard to come by, but, as evidenced by the Waggin’ Train deal and others, strong companies can command a multiple of revenue, even when they have significant scale. Others that fall in this bucket are Unicharm Petcare and Pets at Home.

RH: Private equity is still talking multiples of revenue. Strategic buyers appear willing to pay premium multiples (10x EBITDA) for what they see as sustainable earnings for brands they can grow and extend.

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