Woolworths Group boss Brad Banducci says there is plenty of growth left in the booming pet sector, from doggy daycare to nutrition and grooming, after the grocery giant snapped up a 55 per cent stake in pet business Petspiration Group for $586 million.
After a puppy boom during COVID-19 lockdowns, the retailer will use funds from its recently sold down stake in Endeavour Group to enter a new category, buying a majority stake in the No. 2 player in the fast-growing $10 billion specialty pet sector.
The deal was foreshadowed on Sunday by The Australian Financial Review’s Street Talk column.
The privately held Australian and New Zealand pet food, accessories and services retailer operates the PETstock brand and has a network of 276 retail stores, 65 vet clinics and 162 grooming salons.
It also has an established e-commerce platform, a 2.4 million-member loyalty program, and a strong own-brand range including names such as Caribu and Glow.
Mr Banducci looked to reassure investors he had not overpaid for the stake, telling media that 70 per cent of Australians have a pet, and he was confident the investment would deliver a strong return for shareholders.
“We don’t see this as a peak. This trend has been around for some time. Pet ownership is not going down. It may have been pulled forward somewhat in COVID,” he said.
He told investors that the growth story of PETstock had been consistent over past ten years. Mr Banducci said there were plenty of growth options left across the business, pointing to addressing animal needs outside the city, including horse care.
Drinks to dogs
He said growth would come from categories of food, nutrition, toys and pet services, such as puppy training and grooming, while doggy daycare was also still in its infancy.
In afternoon trade, Woolworths shares rose 30¢ to $34.32 each.
Assuming net debt of about $670 million (including $380 million in leases), this implies an enterprise value of about $1.7 billion for the company.
The purchase will be funded from the proceeds of Woolworths’ sell down of a 5.5 per cent stake in drinks and pubs business Endeavour.
The sales price represents a multiple of 11-times EV/EBITDA, based on the past 12 months of earnings to September of $158 million.
PETstock generated almost $700 million in sales and $54 million in profit before tax in fiscal 2022, according to accounts lodged with the corporate regulator. In July, it acquired Petcity for $31 million and Best Friends Retail for $180 million.
Analysts have been critical of “distracting” deals that are considered non-core for Woolworths, such as Shopper Media and the MyDeal marketplace platform.
“None of these deals distract from our food business,” Mr Banducci said, who noted that talks with Petspiration had been going for 18 months.
Woolworths also owns online pet store PetCulture, a joint venture with PetSure, which is backed by Hollard Australia. Mr Banducci said Woolworths was Australia’s second-biggest pet insurer and would look to cross-sell products.
One investment analyst said although PETstock appeared to be a good business, this deal complicated Woolworths and diluted the world-class core of food retailing.
“You can wrap it in a digital catchphrase and call it an ecosystem, but in the end, it appears they’re regrowing the conglomerate structure that Brad did such a great job of slimming down and simplifying,” he said.
Mr Banducci said he was attracted to the culture at Petspiration and the “amazing” loyalty program that was the seventh-biggest in the country. He believed Woolworths could lend its expertise in supply chain and commodity sourcing.
Petspiration was founded by Shane and David Young in Ballarat in 1991. The pair and other existing shareholders will retain a 45 per cent stake. The Youngs will continue as chief executive and managing director, running Petspiration as a standalone business within Woolworths under a separate board structure.
Mr Banducci expected the transaction to deliver an internal rate of return in the mid-teens, with opportunities for strong earnings growth ahead.
Von Ingram, the newly appointed managing director of Woolworths’ W Living, will take responsibility for the new partnership.
The deal is subject to ACCC and NZCC approvals, with completion expected in mid-calendar 2023.
Extracted from AFR
