The first four months of 2013 saw increased transaction activity in the pet industry, resulting in 10 announced transactions: 8 M&A deals and 2 private placements. Pet Transactions are on pace to exceed the total of 29 announced transactions in 2012. The pet industry continues to experience premium valuations compared to consumer products; strong, growing brands tend to sell for 1.0x to 2.0x revenue or 6.0x to 12.0x EBITDA.

Ten transactions closed in the first four months of 2013, most of which were strategic acquisitions. Companies that were purchased include Union Aquarium and Pet Supplies, Summit Pet Product Distributors, Draper Valley Farms, Pup-Pee Solutions, FreeHand, Royal Pet Supplies, and The Olive Press. Animal Supply Company and Phillips Pet Food and Supplies continue to be some of the most active strategic acquirers in the space.  While I was writing this article, I got the news that Phillips had just purchased Pet Food Limited/PFX.  The activity in the distributor space is just crazy.  Let’s hope pet product manufacturers don’t someday have just two distributors to choose from!

Once again, the majority of transactions (80%) in the first four months of 2013 were strategic acquisitions, on par with final 2012 results (83%). The trend of increased consolidation in the fragmented Pet Industry continues, led by key players such as Radio Systems. In the last 6 months alone, Radio Systems has acquired Lucky Litter, Pup-Pee Solutions, adding to earlier acquisitions of Premier Pet Products, JGB Distributing, and Veterinary Ventures.

There is also significant private equity involvement in the industry. So far in 2013, three pet companies have transacted with PE Groups: Phelps Industries, TDBSS, and Bark & Co. TDBSS and Bark & Co both completed private placements, with the latter receiving $5 million from a group of investors led by Polaris Partners. Other active Private Equity Groups include Wafra Partners and Culbro, LLC.

Overall, median middle-market valuation multiples decreased from 8.9x EBITDA in 2011 to 8.0x EBITDA in 2012. Although multiples decreased, the percentage of debt used in deals remained stagnant. The low level of debt used in transactions is surprising given low interest rates and relative ease of capital access. Low use of debt now could lead to increased use of debt, and thus deal activity, in 2013.

Lowest valuation multiples, clocking in at 3.48x, closely followed by energy (4.73x). Valuation multiples seem to be picking up so far in 2013, signaling prosperous times ahead for business owners and investors.

 Macroeconomic Conditions

Increased pet Industry activity in 2013 represented a deviation from overall deal activity. Overall deal activity in the first quarter of 2013 plummeted, with 355 completed transactions representing $52 billion of invested capital, compared to 564 transactions and $126 billion of invested capital in the fourth quarter of 2012. The slowdown in 2013 is likely a result of sellers rushing to close deals before anticipated tax changes and the so-called “Fiscal Cliff.” Now that the tax situation is clearer and more certain, M&A activity is expected to increase through the remainder of 2013. The Consumer Expectations Index (CEI) ticked slightly higher in March, continuing a trend of monthly increases since December. Typically, monthly increases in the CEI are a leading indicator that consumer confidence in the economy is rising, and consumers will continue to spend money. Although many economists predict a recession in 2014, revised reports indicate the recession will be milder than anticipated, resulting in only a 1.2% decline in industrial production before returning to steady growth in 2015.

We anticipate the pet industry will continue it’s growth trajectory over the next several years as baby boomers continue to lead the way In pet spending.  However, as baby boomers age and don’t replace their pets, the industry may go through a decline in the next 5 to 10 years because it appears that the Gen X, Y, and Millenials do not have the same rate of pet ownership.  More on this subject in my June column on pet industry trends.

Overall, macroeconomic conditions bode well for both the Pet Industry and the US economy in general, at least in the very near future.

Carol Frank of Boulder, CO, is the founder of four companies in the pet industry. As a Managing Director at SDR Ventures Investment Bank, she is a registered Investment Banker and leads the team in executing pet industry transactions including M&A, capital formation and strategic advisory services.  She is also the owner of BirdsEye Consulting, the consummate source for pet sector consulting expertise in licensing, executive recruiting, market research, and sales channel strategy. She can be reached at