Pet Sector M&A Update – September 2024

Active Acquirers in the Pet Sector Include Consumer Packaged Goods and Animal Health Companies as Spending Climbs

Consumer spending on pets has grown at a faster pace than spending on either human food, merchandise, or wellness—fueling sector growth and revenue, according to a Nielson IQ webinar.¹ Rising pet ownership and the humanization of pets have resulted in increased consumer spending via in-store and online channels, propelling sales growth in the Pet sector. The total Pet market value grew 8.2% year-over-year (YOY) from 2022 to 2023, with in-store and online sales growth of 5.0% and 13.4%, respectively, according to the webinar. Capstone experienced strong acquirer interest in the Veterinary Products and Consumer Branded segments of the Pet market, as evidenced by the recent Capstone advised closings of CP Medical and Ultra Pet (see below). Brick and mortar locations have continued to attract pet owners, comprising 61% of total U.S. sales, by placing a greater emphasis on exceptional customer service and pet friendly environments inside stores. Of note, the largest pet franchise retailer, Pet Supplies Plus, has sought to improve its competitiveness with new in-store offerings across more than 700 stores. The company expects to increase its network by 50 new stores in 2024 and up to 80 locations per year from 2025 onwards, according to GlobalPETS in an interview with Pet Supplies Plus CEO, Christopher Rowland.² Concurrently, the Online segment has demonstrated significant growth and strong repeat customers. Chewy (NYSE:CHWY), a leading online retailer of pet food and other pet-related products, has developed a robust distribution model and strategic relationships with vendors to deliver pet food and goods at prices that are cost-effective for customers. In Q1 2024, Chewy attained record sales in their Autoship segment, totaling $2.2 billion, or 77.6% of net sales, while net sales per active customer (NSPAC) rose 9.6% quarter-over-quarter to $562, according to Chewy’s Q1 earnings report call.³ “NSPAC growth meaningfully outpaced our overall top-line growth, driven by our ability to increase wallet share as customer cohorts mature and continued strong engagement, particularly in programs like Autoship and expansion into new categories, namely within Chewy Health. Our scaled Autoship business continues to be a pillar of strength and differentiation for Chewy, driving predictable subscription-like revenue,” said David Reeder, Chewy CFO, in the earnings call. To capitalize on sector sales growth and new product trends, acquirers in the Pet space have increasingly targeted companies focused on the quality of pet health—especially in the Food and Supplements segments.

We continue to see a high level of buyer interest across all segments of the Pet sector. Premium acquisitions, such as the recent $1.4 billion take private transaction for Pet IQ by Bansk Group, illustrates the faith investors have in the continued strength of the sector. Additionally, M&A continues to be a key component of growth strategies across all classes of buyers.

Tom ElliottManaging Director, Capstone Partners

Pet Sector M&A Activity Witnesses Rise in Pharmaceutical Deals, Buyers Remain Hungry to Transact

Mergers and acquisitions (M&A) in the Pet sector have become a significant strategy for companies to expand their market presence, diversify product offerings, and achieve economies of scale. M&A volume in the Pet sector has softened to 60 deals announced or completed year-to-date (YTD), marking a decrease of 11.4% year-over-year (YOY). The appetite for Pet Consumables among private equity (PE) firms has reversed the trend we witnessed in 2023. PE add-ons in the space have proliferated as sponsors have shifted their focus from improving operations at portfolio companies to making acquisitions. This has been evidenced by Pet sector add-on deals rising 84.6% YOY to 24 deals YTD. While all other deal types fell, add-ons by PE firms comprised 40% of sector activity compared to 17.8% of deals in the prior year. PE firms have been utilizing add-on transactions to gain market share within product categories, meet growing demand for new products, and gain a presence in additional geographies. Notably, Wind Point Partners’ portfolio company Targeted PetCare (TPC) acquired Pet Brands, a pet treats company based in Dublin, Ohio. The acquisition was intended to expand TPC’s capabilities in high-growth pet treat categories, such as jerky, soft chews, dental chews, purees, and bones. Additionally, Vanterra Ventures-backed Mixlab acquired NexGen Animal Health for an undisclosed sum in May. The acquisition significantly expands NexGen’s state-of-the-art pharmacy services after 2023 saw Mixlab partner with 7,000 veterinarians and 55,000 animal owners across 6,700 cities, according to a press release.⁴ “This acquisition marks a key milestone for Mixlab as we expand our offering with sterile and non-sterile preparations for the Equine, Wildlife, and Zoo markets,” said Mixlab CEO Fred Dijols, in the press release. Additionally, the total value of deals disclosed has remained on par with the previous three-year period, averaging $287.8 million YTD versus $284.8 from 2020-2023. The uptick in add-on acquisitions and the coinciding strength in deal values has demonstrated growing investor confidence and a healthy backdrop for rebounding M&A volume.

Sector acquirers have continued to demonstrate a willingness and desire to transact in the Veterinary & Pharmaceutical segment. M&A targets in this segment have comprised 35% of sector transactions to-date, representing the most active pocket alongside the growing acquisition activity in the Services segment (35% of YTD deals). Within the segment, buyers have aggressively pursued acquisition targets in the Pet Pharmaceuticals subsegment, with 15 transactions announced or completed YTD compared to five in the prior year period. The Pet Pharma space has experienced nice tailwinds driven by increased pet ownership and higher spending on pet healthcare. The segment’s high revenue and profitability is due in part to premium pricing and a priority placed by pet owners on their pets' health. This has provided an attractive investment environment. Of note, Phibro Animal Health (Nasdaq:PAHC) announced the acquisition of the medicated feed additive (MFA) and certain water-soluble product portfolios of Zoetis (NYSE:ZTS) for an enterprise value of $350.0 million, equivalent to 0.9x EV/Revenue (April). “This investment will enhance, diversify, and broaden our portfolio globally and help us continue to deliver value to our customers and to our shareholders. We believe our cash generation will allow for continued investment into our higher growth businesses of Nutritional Specialties, Companion Animal, and Vaccines. I am confident we have the right capabilities to integrate and strengthen this business,” said Jack C. Bendheim, Chairman, President, and CEO of Phibro, according to a press release.⁵ With the divestiture, Zoetis improves its disciplined capital allocation strategy to focus its livestock investments on other solutions, including vaccine, biologic, and genetic programs. Capstone expects a wave of deals to hit the market, characteristic of Zoetis’ divestiture, as players in the Pet sector look to realign portfolios, enhance cash flow generation, and commit new capital to targeted end markets.

Capstone Partners Sees Pharmaceutical and CPG Trends Materialize in Recent Closings

Capstone has witnessed demand for companies selling high-quality products, such as premium pet foods, treats, and health supplements. In addition, advancements in veterinary medicine and heightened awareness of pet health and wellness have expanded the focus on therapeutic products. With the sector's positive growth trajectory, M&A activity is expected to remain a vital strategy for companies aiming to capitalize on the increasing demand for health-oriented pet products and therapies. Capstone-advised transactions reflecting these trends are outlined below.

• Capstone Partners Advises CP Medical on its Sale to Riverpoint Medical, a Portfolio Company of Arlington Capital Partners (July 2024, Undisclosed) — Capstone Partners advised CP Medical, a wholly owned subsidiary of Theragenics Corporation and a leading manufacturer of medical sutures, on its sale to Riverpoint Medical (July 2024). Terms of the deal were not disclosed. Founded in 1990 and headquartered in Norcross, Georgia, CP Medical is a leading manufacturer in the suture space with a specialization in surgical applications and wound closure products for the Animal Healthcare market. CP Medical products are primarily sold to the Veterinary market with limited distribution in the Dental and Dermatology segments. The company manufactures private label suture products for Covetrus, the largest distributor of veterinary products in the U.S. The addition of CP Medical aligns seamlessly with Riverpoint’s growth strategy and allows the company to further its commitment to delivering high-quality surgical solutions while leveraging established relationships.

“The Capstone team brought deep industry knowledge to our process and their senior level was engaged throughout. Their entire team was extremely responsive from start to finish and, most importantly, understood our business’ unique attributes. Their marketing efforts generated significant interest which ultimately led to identifying the ideal partner and a successful outcome,” said Warren Sutherland, CEO of CP Medical.

• Capstone Partners Advises Ultra Pet on its Sale to Oil-Dri Corporation of America (May 2024, $46 Million) — In May, Capstone Partners advised Ultra Pet, a leading supplier of silica gel-based crystal cat litter, on its sale to Oil-Dri Corporation of America (ODC:NYSE) for a purchase price of $46 million. Ultra Pet, headquartered in Anderson, South Carolina, is a recognized innovator and pioneer within the Alternative Cat Litter market with annual net sales of approximately $24 million. Ultra Pet introduced the original crystal cat litter, Litter Pearls, in the U.S. in 1998. Since then, Ultra Pet has expanded its product offerings and has an established presence in the Crystal Cat Litter segment. The company’s product portfolio includes brands such as Ultra Pearls, Litter Pearls, Neon Litter, EcoKitty, and ZenKitty as well as many private label offerings. Ultra Pet sells to consumers both domestically and internationally through e-commerce channels and retail stores including Amazon (Nasdaq:AMZN), Publix grocery stores, and more. Ultra Pet’s sourcing expertise complemented Oil-Dri’s vertically integrated Clay operations, and Oil-Dri plans on leveraging grocery, mass merchandiser, and other growth channels relationships to help increase sales of Ultra Pet’s unique crystal litter products.

“Joining Oil-Dri opens up incredible opportunities for our crystal cat litter products. Oil-Dri’s strong relationships within the industry, and its proven track record in product development, operational efficiency, and collaboration with customers will enhance Ultra Pet’s growth trajectory. Our products complement each other very well, and our combined strengths will allow us to grow the business and reach even more consumers and their feline companions,” commented Richard Murbach, CEO of Ultra Pet.

To discuss the dynamics of the growing demand for pet services and products, provide an update on your business, or learn about Capstone's wide range of advisory services and Pet sector knowledge, please contact us.

Neve Adler, Analyst, was the lead Market Intelligence contributor to this article.

Endnotes

1. Nielson IQ, “The State of Pet: The Full View of the Omni Pet Channel & Shopper,” https://nielseniq.com/global/en/insights/multimedia/2024/the-state-of-pet-the-full-view-of-the-omni-pet-channel-shopper/, accessed July 26, 2024.

2. GlobalPETS, “Interview with CEO of Pet Supplies Plus: ‘We’re seeing 20% growth in our services business’,” https://globalpetindustry.com/article/interview-with-ceo-of-pet-supplies-plus-were-seeing-20-growth-in-our-services-business, accessed July 26, 2024.

3. Chewy, “Chewy First Quarter 2024 Earnings Call,” https://events.q4inc.com/attendee/775358139, accessed July 26, 2024.

4. Mixlab, “Mixlab Expands Veterinary Compounding Offering into Large Animals with the Acquisition of NexGen Animal Health,” https://mixlab.com/blog/expansion-into-large-animal-with-acquisition-of-nexgen, accessed August 12, 2024.

5. Phibro Animal Health, “Zoetis to Sell Medicated Feed Additive Portfolio to Phibro Animal Health,” https://investors.pahc.com/press-releases/press-release-details/2024/Zoetis-to-Sell-Medicated-Feed-Additive-Portfolio-to-Phibro-Animal-Health/default.aspx, accessed July 26, 2024.