Fifteen years after it was taken private, the American pet retailer, Petco has once again been taken public, that too at a price that surpassed the company’s expectations. The San Diego-based retailer announced Wednesday the pricing of its initial public offering at $18 per share for a total of 48 million shares of Class A common stock, generating $864 million. The price was well-above the forecasted range of $14 to $17 by Petco. At the price of $18 per share, the company’s market valuation goes up to $4.6 billion.
Goldman Sachs and BofA are serving as the joint lead book runners for the IPO. Citigroup, Evercore ISI, Credit Suisse, UBS Investment Bank, and Wells Fargo are serving as joint book runners, while Baird, Guggenheim Securities, AmeriVet Securities, C.L. King & Associates, R. Seelaus & Co., LLC, Ramirez & Co., Inc., and Siebert Williams Shank are serving as co-managers.
Underwriters have been given a greenshoe option that allows them to buy an additional 7.2 million shares of Petco’s Class A common stock, within 30 days, after deduction of the underwriting discounts and commissions. The shares will start trading from Thursday on the Nasdaq under the ticker symbol, “WOOF”. The offering is estimated to conclude on Tuesday, January 19, 2021, subject to the satisfaction of customary closing conditions.
The pet health provider expects to get net proceeds of around $816.5 million, after deduction of underwriting discounts and commissions, excluding any exercise of the greenshoe option by underwriters to purchase additional shares.
Petco’s Journey To Going Public
Petco was founded back in 1965 and has built its brand since then. It is not new to going public. The first time the pet firm went public was back in 1994 before it was taken private in 2000. It was taken public again in 2002 before going private again in 2006.
The current owners of the company are CVC Capital Partners and Canada Pension Plan Investment Board. The two entities bought Petco from TPG and Leonard Green in 2016 for $4.6 billion. TPG and Leonard Green had decided to take Petco private in 2006, a decade before the acquisition by CVC Capital Partners and Canada Pension Plan Investment Board.
Coronavirus – A Blessing In Disguise For The Pet Industry
In the video prepared for the company’s virtual roadshow, Petco’s CEO, Ron Coughlin, said that the company’s unique position allows it to outrun both physical and online rivals. Petco has over 1500 pet care centers including over 100 veterinary hospitals across the US, Puerto Rico, and Mexico which offer pet care services, online fulfillment centers, grooming, training, as well as pet food and toys.
Coughlin pointed out that the surge in adoption rate caused by the pandemic will serve as a continuous sales driver for the company as more than 3.3 million new pets were adopted during the pandemic. He estimates that the growth in pet-related spending could translate into a $4 million annual increase in the total market over the coming four years, leading to an increase in the shareholder value.
According to Shelter Animals Count, adoptions increased by 15% in 2020 as compared to 2019. A LendingTree poll revealed in October that 1 in 3 pet owners was spending more on their pets during the pandemic even when unemployment was on the rise and spending in other areas decreased.
Looking at Petco’s position relative to its e-commerce rival, Chewy, the vast store network gives the retailer a great advantage that it can further capitalize on. With over 1,500 stores, customers get the ease of picking up online orders from the stores. The orders can also be delivered locally from the stores which results in shipping costs savings.
The pet chain currently has 105 veterinary hospitals added to its stores. These stores have seen a surging increase of 600 basis points in sales of retail products. Petco is further planning to add hospitals to 900 stores and increase its telehealth services.
What’s more, is that Petco has been flexible in adapting to the changing market dynamics. It has spent the last two years upgrading its online systems and when the pandemic hit, it was ready to reap the benefits. In the past year alone, 3.5 million new online customers were engaged in buying Petco’s products.
However, looking at the overall pet market, there is a lot of competition from retailers including Amazon, Target, Walmart, PetSmart, and Chewy. Chewy specifically has seen a five-time increase in its shares since it hit the market more than a year ago.
Moreover, Petco disclosed in its IPO prospectus that the IPO proceeds will be used to pay off interest and repay $300 million of principal on its debt. And still, there will be significant debt left on its books. As of October 2020, the company had a debt of around $3.3 billion. History shows that investors have been hesitant to invest in stocks that are used for paying off debt.
More Pet-Focused IPOs
Another pet company, BarkBox, is expected to go public via a merger with a SPAC called Northern Star Acquisitions in the second quarter of 2021. BarkBox provides monthly subscription services for dogs and will be listed on the New York Stock Exchange under the ticker symbol, “BARK”.