M&A Pet Transactions slowed after the first quarter of 2012, resulting in a total of 29 announced transactions in comparison to 41 announced transactions in 2011. The pet industry also continues to experience premium valuations compared to its consumer products brethren. Strong, growing brands have been selling for 1.0x to 2.0x revenue or 6.0x to 12.0x EBITDA. In other consumer products segments, anything above 1.5x revenue and 7.0x EBITDA is considered noteworthy.

In 2012, strategic acquisitions led the way with 83% of the total transactions, an increase from the 63% seen in 2011. These numbers reflect the trend of increased consolidation in the fragmented Pet Industry by key players such as Animal Supply Co. and Pet Mate. In fact, Animal Supply Co. acquired both Lone Star Pet Supply, Inc. and the California operations of Zeus and Company in the fourth quarter of 2012 alone. Petmate acquired both JW Pet Co. Inc. and Canine Hardware Inc. in the fourth quarter of 2012 as well. Distributors like Animal Supply Co. seek out companies with strong geographic representation of top brands, while manufacturers like Petmate seek out growing pet companies with strong brands.

The remaining 47% and 27% of transactions in 2011 and 2012, respectively, were financial, reflecting the interest of Private Equity Groups in the Pet Industry. The Pet Industry’s recession resistance in contrast to other consumer product industries is a big draw for PEGs. To an extent, the fragmented nature of the Pet Industry provides a challenge for PE Groups who are not looking for brands or customer relationships as much as they are looking for critical mass and stand-alone growth. Many financial buyers are still willing to wade into the market and provide the capital for larger players to make add-on acquisitions. Overall, the increase in industry consolidation and private equity interest in the pet Industry bode well for the future of the growing companies therein.

The slight slowdown in 2012 was probably not a reflection of the state of the pet industry, but rather a result of the overall caution in the M&A market. Uncertainty brought on by the presidential election, from which results would greatly affect tax rates and capital gains rates, and the fiscal cliff made many buyers and sellers hold off on transactions. By the close of 2012, the uncertainty that many buyers and sellers felt was, for the most part, settled. Expect M&A growth in 2013 as a result of increased certainty and a strong economy. The last three weeks of the year, saw a significant increase in transactions not only due to the resolution of political uncertainty, but also due to the possibility of a large tax increase on the horizon.

Expect this upswing into the beginning of 2013, especially now that the uncertainty from 2012 is resolved. The consolidation of the pet industry should continue, which bodes well for growing companies with strong brands in 2013. As I have said many times to pet manufacturers – if you have a solid brand, good margins, and multiple years of growth, the world is your oyster. Not only are strategic buyers hungry for these types of acquisitions, but the number of contacts I have had from Private Equity looking to invest in pet has recently skyrocketed. However, it is the classic case of “too much money chasing too few goods.” The lack of quality sellers is driving demand and prices up, which means private equity will most likely lose out to the strategics with a strong vision for growth and cash on their balance sheet.

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 market research; licensing, executive recruiting, and sales channel strategy. She can be reached at carol@carolfrank.com.