Pets at Home Group Plc Market Cap (as of 21/02/2014): N/A

KKR & Co. LP Market Cap (as of 21/02/2014): $16.683bn

On February 19th Pets at Home Group Plc, the UK’s largest specialist retailer of pet products, announced its intention to float on the main market of the London Stock Exchange with primary shares. In such a way, the company expects to raise about £275mm, thus increasing retailer’s value to £1.5bn from £995mm paid four years ago by the private equity firm KKR to take over the company. 

Founded in 1991, Pets at Home is the market leader in the highly fragmented UK Pet Care Market with a 12% market share in 2012 and 369 stores located across the UK. Moreover, the company operates in the small animal veterinary business mainly through strategic JVs under the Companion Care and Vets4Pets brands with 246 veterinary surgeries. Finally, Pets at Home also operates 116 in-store      Groom Room grooming salons.

The pet product retailer gained its leading position in the UK market through organic investment and selected strategic acquisitions (Vets4Pets was the last in March 2013). Indeed, the company has spent more than £120mm in Capex over the last three years, expecting to enlarge the store network to over 500 stores and the veterinary business to more than 700 veterinary practices in the medium term, according to the company’s CEO, Nick Wood.

The IPO will support company’s growth raising about £275mm which will allow the company to reduce its indebtedness and, together with proceeds of £325mm from new facilities, it will repay the current burdensome amounts outstanding.

Indeed, although operating margins have decreased since KKR take over in 2010 from 15.5% to 13.8% in 2012/2013, EBITDA has shown a positive and stable trend over time; the £110mm forecasts in 2013, compared to £101mm of the previous year, confirm the good tendency. However, investors may worry about the £89mm in interest costs which bite on earnings and make net margin extremely vulnerable to one-off items.

In this perspective, the decision to float the company becomes pivotal in order to relieve the company from the excessive cost of debt and hence give it the chance to better exploit business opportunities. In fact, UK Pet Care Market is worth £5.4bn, recording a CAGR of 2.6% over the 2008-2012 period; a result that outpaces the general UK retail sector trend (CAGR of 2.2% over the same period). Moreover, sector’s growth will be further driven by positive macroeconomic factors, while the increasing demand for premium pet products, in which Pets at Home is specialised, will further enhance company’s growth possibilities.

Furthermore, the environment is extremely appealing for IPOs: as economic conditions are becoming more favourable in the UK, with consumers’ confidence at its highest since 2007, so is investors’ appetite for IPO market and high returns. Companies are raising funds to take advantage of the fast-pace recover of UK economy while unemployment is falling and retail sales are increasing, thus fuelling the rush for the retail stocks in London.

Overall, hence there seems to be a bullish outlook for IPOs in Europe as $8.3bn worth of European IPOs are being marketed. If all IPOs go ahead as planned, the first quarter of 2014 will be the strongest start to the year since 2007. UK IPOs amounted to $18.7bn last year, up from $4.7bn in 2012.

Yet, some investors are concerned about the lack of potential upside as these IPOs would merely reflect a chance for company owners (including private equity firms) to cash out; in other words, they might not be willing to provide exit opportunities for these companies. Indeed, deals backed by PE firms took in 43 per cent of the cash raised by European IPOs last year.

Nevertheless, the appetite for IPOs is at its high and Pets at Home should be a great test of investors’ willingness to look at PE owned retailers. Newsagent and convenience store McColl’s, discount firm Poundland and online domestic appliances retailer AO all have plans to list soon. Moreover, there are other PE-backed firms seeking to float: The Card Factory, Game Group and Fat Face.

The £1.5bn valuation entails an EV-to-EBITDA multiple set at 15 times, but Pets at Home would be the first retail firm specialised in pet products to get listed on the market. This makes any comparables valuation extremely vulnerable to subsector-specific factors. Considering the US retail specific lines sector, for instance, the average EV-to-EBITDA multiple stands at 11.94 times as of January 2014 which makes Pets at Home fairly overvalued. However, further information will be published in the prospectus in the coming weeks, helping public and specialists with their own estimates.

The company appointed Bank of America Merrill Lynch, Goldman Sachs and KKR Capital Markets as Joint Global Co-ordinators and Joint Bookrunners while Nomura is acting as Co-Lead Manager.

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