Petco throws Wall Street a bone, tempts investors with public offering - Petco Animal Supplies went private - Brief Article - Statistical Data Included

DSN Retailing Today, Jan 21, 2002 by Katherine Hutchison

SAN DIEGO -- Barely 15 months after Petco Animal Supplies went private in a leveraged buyout, the company filed with the Securities and Exchange Commission on Dec. 21 to return to the Nasdaq Market listing. The nation's second-largest pet products retailer, which originally went public in 1994, said it plans to sell up to $287.5 million in common shares that it would use to buy back preferred stock.

Petco had kept open the option of reverting to a publicly traded entity since its buyout in October 2000, led by Los Angeles-based equity firm Leonard Green & Partners, according to a Petco spokesman. No underwriter, offering date or price has yet been set, but the time line is shaping up to be sometime this spring, he said, adding the company is in the mandatory "quiet period" and could not discuss the pending initial public offering in detail. Donaldson, Lufkin & Jenrette advised Petco in its going-private transaction.

The company's decision to go private in 2000 was motivated mostly by the devaluation of its stock price following its e-commerce investments and a key vendor's changes in distribution.

The 35-year-old retailer, along with its specialty competitors, was hurt by the expansion of Tams brand pet food into supermarket and mass channels following the Iams Co.'s acquisition by Procter & Gamble in 1999. Petco's stock price lost about one-fourth of its value on the acquisition news alone, opening the door to a "friendly buyout," such as Leonard Green's. Whereas the Iams brand represented 9% of Petco's total sales in fiscal 1999, it has dropped to about 5%. Same store sales growth in fiscal 2000 and first quarter 2001 took a hit as a result.

Perceived risk to Petco's financial results from its investment in the e-commerce startup Petopia.com and the competitive pressure expected to arise from other dot-coins also put the company on the outs with Wall Street. To salvage its market valuation, the retailer even entertained a merger with chief rival PetsMart.

Green's offer of $22 per share in cash represented a 47% premium over Petco's stock price in early 2000. Green and other investors contributed about $600 million of equity for a 75% stake in the company. Petco management, led by ceo Brian Devine, was retained after the buyout.

Though its sales have grown at a healthy 21% compounded annual rate for the past five years, Petco has been saddled with losses in its dot-coin business. For the 12 months ended Nov. 3, Petco reported a total loss of $16 million on sales of $1.3 billion and lost $20 million in fiscal 2000, largely due to Internet operations and other merger-related costs. By comparison, the company earned $21.8 million in 1999.

Petco, which would trade under its former ticker symbol PETC, intends to use the IPO proceeds to redeem the preferred stock it issued when it went private, eliminating the costly dividends that must be paid on it.

The company introduced its new "Millennium" store model in California in 2000 and expanded it to other markets in 2001. With 560 stores in 41 states, it plans to increase its store count by 35 to 45 per year over the next five years. Petco said shifting its product mix from low-margin pet food to higher-margin categories, such as small animals, toys and supplies, is driving double-digit gains in gross profits.