pet industry update august 2017 - brooks houghton · pet industry update august 2017. brooks,...

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Pet Industry Update

August 2017

BROOKS, HOUGHTON & COMPANY, INC. 2

Brooks, Houghton & Company, Inc.

Introduction

Brooks, Houghton & Company, Inc. (“BHC”) is a merchant banking firm dedicated to providing corporate finance advisory services and direct investment to:

• Middle-market public and private companies

• Emerging growth companies

Founded in 1989, BHC emphasizes building long-term relationships with its clients by:

• Providing innovative corporate finance solutions and professional execution at a reasonable cost

• Taking a partnership approach with clients based upon mutual trust and responsibility

• Delivering independent, objective and discreet advice

Applying these principles, BHC has earned a reputation for providing high quality, reliable professional services to its corporate clients, investors and referral sources in the United States and internationally

BHC’s merchant banking products and services include:

• Mergers and acquisitions advisory

• Debt and equity private placements through Brooks Houghton Securities, Inc. (BHS), a FINRA member

• Valuations and fairness opinions

• General corporate finance advisory

• Principal investments in interim and bridge capital

Additionally, BHC is a member of Globalscope Partners, a premier global mergers and acquisitions advisors network

Why Brooks, Houghton & Company

BHC is well suited to the task of serving as an exclusive M&A advisor

• Established and experienced merchant bank with both M&A and capital raising capabilities, as well as industry knowledge

• Provide senior-level attention to the assignment on a day-to-day basis

• Offer Wall Street-quality work product and experience

• Well versed in helping small and mid-sized business owners/operators achieve their liquidity and growth objectives

• Long-standing working relationships with third-party capital providers (i.e. senior debt, mezzanine debt and private equity) and strategic partners

• Confident in our ability to attain the best possible transaction outcome

For more information, please contact:

Kevin Centofanti, CFAPresident

Tel: 212-329-1675

[email protected]

Marc R. LeizmanExecutive Director

Tel: 216-287-4228

[email protected]

Anthony MorettiSenior Managing Director and Head of IB

Tel: 212-329-1667

[email protected]

BROOKS, HOUGHTON & COMPANY, INC.

Life Cycle Mature

Revenue Volatility Low

Capital Intensity High

Market Concentration Medium

Regulation Level Very High

Technology Change Medium

Entry Barriers Medium

Competition Level High

3

Industry Overview

Source: IBIS World; American Pet Products Association

Total U.S. pet industry revenue is estimated at almost $70 billion in 2017 with the pet food market segment projected at approximately $27 billion in 2017. An increase

in pet ownership has coincided with a growing tendency to treat pets as members of the family, thereby encouraging the purchase of higher-priced premium pet food

products that are marketed as possessing special benefits, formulations or specialized ingredients.

Products Segmentation

Major Companies in Pet Food Market (Market Share)

Pet Food Market – Revenue

Low Medium Very HighHigh

Industry Structure

Supply Industries

• Soybean Farming• Corn Farming• Vegetable Farming• Meat, Beef, & Poultry Processing• Seafood Preparation

Demand Industries

• Grocery Wholesaling • Supermarkets & Grocery Stores• Convenience Stores• Pet Stores• Consumers

Key Success Factors

Access to high-quality inputsProduction of premium

goods and services

Effective quality controlEconomies of scale and scope

0.0%

1.0%

2.0%

3.0%

24,000

26,000

28,000

30,000

32,000

2016 2017 2018 2019 2020 2021

$ million % Change

Natural and organic pet

food and treats, 31.3%

Dry dog food, 30.3%

Dry cat food, 12.4%

Dog treats, 8.7%

Wet cat food, 8.2%

Wet dog food, 7.1%

Cat treats, 2.0%

Nestle SA, 19.6%

Mars, Inc., 16.8%

The JM Smucker

Company, 9.0%

Colgate-Palmolive Company,

5.1%

Blue Bufflo Pet Products, Inc.,

4.3%

Other, 45.2%


Market Overview – Key External Drivers

Source: IBIS World; World Bank

The U.S. pet food market’s revenue growth has been driven by increasing disposable income, growing pet ownership with a tendency to treat pets as family members

(growing prevalence of pet parents) and a heightened focus on organic and premium pet food products. The industry profitability has benefited from falling agricultural

commodity input costs, lowering industry operators’ purchase costs.

Per Capita Disposable Income Number of Pets (Cats and Dogs) Key Takeaways

Demand from Pet Stores Agricultural Price Index

• The pet industry is recession resistant as pet

owners tend not to cut back on pet food

spending during an economic downturn

• Ownership of cats and dogs is a strong demand

determinant for pet foods, as growth in the

number of these pets drives demand for pet

food

• Pet stores represent a major market for dog

and cat foods, which offers consumers a one-

stop shop for all their pets’ needs. Online pet

food and pet supply sales ($4.9 billion in 2016)

are increasing, with more pet owners buying

their pet food from Amazon and other websites

like Chewy

• Since a variety of livestock and crop inputs are

utilized in pet food production, falling

agricultural prices have lowered input purchase

costs

0.00%

2.00%

4.00%

6.00%

2015 2016 2017 2018 2019 2020 2021

% c

han

ge

0.0%

2.0%

4.0%

155

160

165

170

175

180

185

190

2016 2017 2018 2019 2020 2021

Millions % Change

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

17000

18000

19000

20000

21000

22000

2016 2017 2018 2019 2020 2021

Millions % Change80

90

100

110

120

2012 2013 2014 2015 2016 2017


M&A Deal Activity – Overview

Source: Pitchbook, Thompson One, GF Data *As of 3/31/2017

• Perceived high valuations and the anticipation of a tax reform contributed to the

slow down in the U.S. M&A market during 1Q 2017

• The lower middle market remains the most active market sector despite seeing a

slight decrease in terms of market share compared to 1Q 2016

• Valuation multiples for middle market transactions below $250mm remained steady

• 2016 represented a slow down in pet food M&A compared to the previous three

years

• Valuations for pet food companies are historically high, so investors are looking

elsewhere for values, and there is a scarcity of opportunities after the big deals in

recent years

M&A Deals by Deal Size U.S. M&A Activity

U.S. M&A Activity & Transactions in the Pet Food Market U.S. EV / EBITDA Multiples By Transaction Size

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

2013 2014 2015 2016 2017

$5B+

$1B-$5B

$500M-$1B

$250M-$500M

$100M-$250M

Under $100M

$5

54

$5

88

$7

18

$6

85

$9

84

$1

,36

4

$1

,38

6

$265

7,104

8,175

9,2088,616

10,824

11,627

9,641

1,899

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

2010 2011 2012 2013 2014 2015 2016 2017*

Deal Value ($B) Deal Count

5.6x 5.8x 6.0x6.6x 6.6x 6.4x

8.4x7.8x

7.3x7.8x

9.0x 9.0x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

2014 2015 2016

$10-25mm $25-50mm $50-100mm $100-250mm


Private Equity Deal Activity – Overview

Source: Pitchbook, Thompson One, GF Data

• Across industry sectors, PE-backed transactions have slightly decreased compared to

the same period in 2016 for the same reasons as the overall M&A market

• Transactions up to $100mm still account for about 70% of all U.S. PE deals with a

focus on add-on transactions

• The percentage of add-on transactions has been growing at a steady pace since 2009

• The middle market transactions below $250mm have been stacked up with a large

portion of equity and senior debt, a small portion of subordinated debt for the past

three years

U.S. PE Deals by Deal Size U.S. add-on % of Buyout Activity

1,0

37

1,4

54

1,0

90

75

0 1,1

40

1,3

49

1,5

23

1,4

24 1,8

71

1,9

36

1,8

70

36

6

1,2

09

1,3

60

1,0

36

59

9

90

6 99

3 1,1

77

96

0

1,2

00

1,2

29

1,0

60

190

46%

52% 51%

56% 56%58% 56%

60% 61% 61%64%

66%

0%

10%

20%

30%

40%

50%

60%

70%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Add-on Non add-on Add-on % of buyout

U.S. Private Equity Deal Activity U.S. Middle Market Capital Stack

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

$2.5B+

$1B-$2.5B

$500M-$1B

$100M-$500M

$25M-$100M

Under $25M

39.4% 37.3% 37.2% 41.9% 44.0% 44.4% 41.8% 38.1% 43.1% 43.1% 43.6% 40.2%

17.1% 14.7% 12.3%12.3%

16.3% 10.8% 11.5% 14.4% 10.1% 12.6% 12.9%11.7%

43.5% 48.0% 50.5% 45.8% 39.7% 44.8% 46.7% 47.5% 46.8% 44.3% 43.5% 48.1%

0%

20%

40%

60%

80%

100%

2014 2015 2016

Senior Debt Sub Debt Equity

BROOKS, HOUGHTON & COMPANY, INC.

9.0x

9.9x

9.4x

9.1x

16.2x

16.9x

5.0x 10.0x 15.0x 20.0x

EV / EBITDA

EV / LTM EBITDA

EV / LTM EBITDA(Pet Products)

(Consumer Products w/Pet Lines

7

Valuation Summary

Key Takeaways

• The two powerful consumer trends, the

humanization of pets and growing demand for

premium and natural foods, in the pet food

sector have significant impact on the

valuations

• Based on precedent transactions since 2012,

the EV / Revenue range is 0.6x to 3.4x, while

the valuation range based on public

comparable companies ranges from 1.0x to

3.9x (pet products) and from 1.1x to 4.7x

(consumer products with pet lines)

• EV / EBITDA multiples of public comparable

companies range from 9.4x to 16.9x (pet

products) and from 9.9x to 16.2x (consumer

products with pet lines)

• The assessment of the EV / EBITDA multiple

for precedent transaction yields a broad

multiple range as a result of too few data

points, however, the average of the

transactions was 12.8x

EV / Revenue Multiple Range

EV / EBITDA Multiple Range

Public Comparable Companies

Precedent M&A Transactions

Public Comparable Companies

Precedent M&A Transactions

With most companies in the pet food space being private, this valuation summary is based on the limited data available on precedent transactions, four pet products

public companies, and six consumer products public companies with pet lines. In general, valuations remain high due to robust M&A activity fueled by private equity

interest, mainstream food companies looking to participate in the pet food market and companies within the space looking to consolidate over the past few years.

Source: CapitalIQ

0.6x

1.1x

1.1x

3.4x

4.7x

3.9x

0.0x 1.0x 2.0x 3.0x 4.0x 5.0x

EV / Revenue

EV / LTM Revenue

EV / LTM Revenue(Pet Products)

(Consumer Products w/Pet Lines


Public Comparable Companies – Detailed Overview

Source: CapitalIQ

Company Name Ticker Business DescriptionShare Price

Enterprise Value

LTM Revenue

LTM EBITDA

LTM Gross

Margin

LTM EBITDA Margin

LTM Revenue Growth

LTM EBITDA Growth

Pet Products

Blue Buffalo Pet Products, Inc.

NasdaqGS:BUFF

Dog and cat food made with whole meats, fruits and vegetables, and other high-quality, natural ingredients

$22.9 $4,624.8 $1,171.9 $273.4 45.3% 23.3% 10.7% 18.6%

Central Garden & Pet Company

NasdaqGS:CENT

Edible bones, edible and non-edible chews, dog and cat food and treats, toys, pet carriers, grooming supplies

31.7 2,130.8 1,917.4 190.3 30.7% 9.9% 9.8% 22.7%

Freshpet, Inc. NasdaqGM:FRPT

Natural fresh, refrigerated meals, and treats for dogs and cats

16.4 554.4 136.1 7.5 45.0% 5.5% 12.9% 48.2%

OurPet's Company OTCPK:OPCO

Various accessories and consumable pet products for improving the health, safety, comfort, and enjoyment of pets

1.4 32.1 27.4 3.4 33.0% 12.4% 12.4% 15.7%

Mean $1,835.5 $813.2 $118.7 38.5% 12.8% 11.4% 26.3%

Median 1,342.6 654.0 98.9 39.0% 11.2% 11.6% 20.6%

Low 32.1 27.4 3.4 30.7% 5.5% 9.8% 15.7%

High 4,624.8 1,917.4 273.4 45.3% 23.3% 12.9% 48.2%

$ in millions


Public Comparable Companies – Detailed Overview (cont’d)

Source: CapitalIQ

Company Name Ticker Business DescriptionShare Price

Enterprise Value

LTM Revenue

LTM EBITDA

LTM Gross

Margin

LTM EBITDA Margin

LTM Revenue Growth

LTM EBITDA Growth

Consumer Products w/Pet Lines

Nestlé S.A. SWX:NESN Pet food, treats and litter under the brands including Purina Pro Plan, Purina Dog Chow, Friskies, Beneful and Purina ONE

$85.4 $281,021.9 $93,012.6 $17,955.9 50.8% 19.3% 0.8% 2.0%

Colgate-Palmolive Company

NYSE:CL Pet nutrition products for everyday nutritional needs and markets its pet nutrition products for dogs and cats; owns Hill's Pet Nutrition

73.9 71,580.6 15,195.0 4,429.0 60.5% 29.1% -3.4% 2.1%

Unicharm Corporation TSE:8113 Pet care products that include pet foods, excrement cleanup sheets, system toilets, and disposable diapers

24.9 15,403.1 6,042.5 991.1 45.5% 16.4% -6.8% 2.2%

The J. M. Smucker Company

NYSE:SJM Pet products comprising dry and wet dog food, dry and wet cat food, dog snacks, and cat snacks; owns Big Heart Pet Pet Brands

118.2 18,887.5 7,392.3 1,666.3 38.4% 22.5% -5.4% -3.1%

Spectrum Brands Holdings, Inc.

NYSE:SPB Specialty pet supplies including dog and cat treats and small animal foods through its Global Pet Supplies business

125.3 11,151.1 4,993.0 897.0 38.6% 18.0% 0.2% 8.7%

Oil-Dri Corporation of America

NYSE:ODC Petcare products from clay minerals; a broad range of litters and liners.

42.6 284.1 261.4 28.6 29.3% 10.9% -0.6% -4.3%

Mean $66,388.0 $21,149.5 $4,328.0 43.9% 19.4% -2.5% 1.2%

Median 17,145.3 6,717.4 1,328.7 42.1% 18.6% -2.0% 2.0%

Low 284.1 261.4 28.6 29.3% 10.9% -6.8% -4.3%

High 281,021.9 93,012.6 17,955.9 60.5% 29.1% 0.8% 8.7%

$ in millions


Public Comparable Companies – Pet Products

Source: CapitalIQNotes: (1) FRPT has relatively high valuation multiples due to its strategy to drive annual sales growth in excess of 20% through 2020, resulting in EBITDA margin of 20% compared to its LTM EBITDA margin of 5.5%

EV / LTM Revenue

EV / LTM EBITDA

3.9x

1.1x 1.2x1.2x

0.0x

1.5x

3.0x

4.5x

NasdaqGS:BUFF NasdaqGS:CENT OTCPK:OPCO

EV / LTM Revenue Median

16.9x

11.2x9.4x

11.2x

0.0x

10.0x

20.0x

30.0x

40.0x

NasdaqGS:BUFF NasdaqGS:CENT OTCPK:OPCO

EV / LTM EBITDA Median


Public Comparable Companies – Consumer Products w/Pet Lines

Source: CapitalIQ

EV / LTM Revenue

EV / LTM EBITDA

3.0x

4.7x

2.5x 2.6x2.2x

1.1x

2.6x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

SWX:NESN NYSE:CL TSE:8113 NYSE:SJM NYSE:SPB NYSE:ODC

EV / LTM Revenue Median

15.7x 16.2x15.5x

11.3x12.4x

9.9x

14.0x

0.0x

6.0x

12.0x

18.0x

SWX:NESN NYSE:CL TSE:8113 NYSE:SJM NYSE:SPB NYSE:ODC

EV / LTM EBITDA Median


Select U.S. M&A Precedent Transactions

Source: CapitalIQ

Strategic BuyerAcquisition Date

Select Corporate Acquisitions

Spectrum Brands Holdings, Inc. 04/28/1701/20/1509/23/14

• Petmatrix, LLC from Friend Skoler & Co. (a private equity firm)• Salix, LLC• P&G, Remaining European Pet Food Brands

Nestlé Purina PetCare Company 07/21/1501/20/14

• Merrick Pet Care, Inc. • Performance Pet Nutrition, LLC

The J.M. Smucker Company 02/03/15 • Big Heart Pet Brands (Big Heart Pet Brands acquired Natural Balance Pet Foods, Inc. on 05/22/13)

$ in millions

Select Active Strategic Buyers

Financial Sponsors(Portfolio Companies)

Acquisition Date

Select Corporate Acquisitions

Frontenac Company(Whitebridge Pet Brands: formerly known as Cloud Star)

04/18/1701/06/1507/16/14

• Arthur Dogswell, LLC (Arthur Dogswell acquired Natural Pet Products on 03/09/2015)

• Tiki brands of Petropics Gourmet Whole Foods• Cloud Star Corporation

Graham Partners, Inc.(Bright Pet)

11/11/1604/28/16

• Mercer Foods, LLC• Ohio Pet Foods, Inc.; Southern Tier Pet Nutrition, LLC; Blackwood

Pet Food, LLC

Berwind Corp.(WellPet)

02/07/1701/07/16

• Whimzees• Sojourner Farms, LLC

J.H. Whitney & Co.(C.J. Foods)

02/16/1606/04/14

• Day Six Pet Nutrition, LLC• C.J. Foods, Inc.

Select Sponsors with Active Portfolio Holdings


U.S. M&A Precedent Transactions from 2012 through 2017

Source: CapitalIQ

Date Target AcquirerTransaction

ValueLTM Revenue

LTMEBITDA

EV / Revenue EV / EBITDA

04/28/17 Petmatrix, LLC Spectrum Brands Holdings, Inc. $255.0 $75.0 - 3.4x -

04/18/17 Arthur Dogswell, LLC Frontenac Company; Whitebridge Pet Brands, LLC

- - - - -

04/04/17 Complete Natural Nutrition Parkers Pet Provisions - - - - -

03/28/17 Nature's Logic VisioCap, LLC - - - - -

03/24/17 Omnipet, LLC (dba “Petflow”) Phillips Feed Service, Inc. - - - - -

02/28/17 Gambol Pet Group Co Ltd. KKR & Co. L.P. - - - - -

02/07/17 Whimzees Berwind Corp.; WellPet, LLC - - - - -

01/10/17 Crosswind Industries, Inc. Archer Daniels Midland Company 81.0 - - - -

11/11/16 Mercer Foods, LLC Graham Partners, Inc. - - - - -

05/11/16 Nature's Variety, Inc. Agrolimen SA - - - - -

04/28/16 Ohio Pet Foods, Inc.; Southern Tier Pet Nutrition, LLC; Blackwood Pet Food, LLC

Graham Partners, Inc. - - - - -

02/24/16 Texas Farm Products Co. Kodo, Inc. - - - - -

02/16/16 Day Six Pet Nutrition, LLC J. H. Whitney Capital Partners; C.J. Foods, Inc.

- - - - -

01/07/16 Sojourner Farms, LLC Berwind Corp.; WellPet, LLC - - - - -

07/31/15 IMS Trading Corp. Central Garden & Pet Co. 25.0 - - - -

07/22/15 Harrison Pet Products, Inc. Bosch Tiernahrung - - - - -

07/21/15 Merrick Pet Care, Inc. Nestlé Purina PetCare Company - - - - -

$ in millions


U.S. M&A Precedent Transactions from 2012 through 2017 (cont’d)

Source: CapitalIQ


ValueLTM Revenue

LTMEBITDA


04/02/15 Partner in Pet Food Pamplona Capital Management, LLC 339.0 260.8 37.7 1.3x 9.0x

03/13/15 Manna Pro Products, LLC Broad Sky Partners - - - - -

03/09/15 Natural Pet Products Arthur Dogswell, LLC - - - - -

03/03/15 Protein For Pets Undisclosed Private Equity Firm - - - - -

02/03/15 Big Heart Pet Brands The J.M. Smucker Company 5,769.2 2,266.5 319.5 2.5x 18.1x

01/20/15 Salix LLC Spectrum Brands Holdings, Inc. 148.0 98.7 - 1.5x -

01/06/15 Tiki brands of Petropics Gourmet Whole Foods

Frontenac Company; Cloud Star Corporation

- - - - -

09/23/14 P&G, Remaining European Pet Food Brands

Spectrum Brands Holdings, Inc. 116.0 193.3 - 0.6x -

07/16/14 Cloud Star Corporation Frontenac Company - - - - -

07/01/14 Cat-Sip Real Milk Treats for Pets PET-AG, Inc. - - - - -

06/04/14 C.J. Foods, Inc. J.H. Whitney & Co LLC - - - - -

06/04/14 Scotts Miracle-Gro Company Global Harvest Foods - - - - -

04/09/14 P&G, Pet Food Brands (Lams, Eukanuba, Natura)

Mars Petcare US, Inc. 2,900.0 1,611.1 200.0 1.8x 14.5x

03/26/14 Three Dog Bakery Undisclosed Private Equity Firm - - - - -

02/10/14 Pet Carousel Inc. Cargill, Incorporated - - - - -

01/20/14 Performance Pet Nutrition, LLC Nestlé Purina PetCare Company - - - - -

12/04/13 Solid Gold Pets, LLC VMG Partners - - - - -

$ in millions


U.S. M&A Precedent Transactions from 2012 through 2017 (cont’d)

Source: CapitalIQ


ValueLTM Revenue

LTMEBITDA


11/06/13 PetAg, Inc. PBI/Gordon Corporation - - - - -

06/20/13 Hare Of The Dog Treat Planet, LLC - - - - -

05/22/13 Natural Balance Pet Foods, Inc. Big Heart Pet Brands 331.0 - - - -

01/11/13 Phelps Industries, LLC Wafra Investment Advisory Group - - - - -

09/13/12 Sergeant’s Pet Care Products, Inc. Perrigo Co. 285.0 142.5 30.0 2.0x 9.5x

08/31/12 Petmatrix, LLC Friend Skoler & Co., Inc. - - - - -

08/21/12 Prestige Pet Products, Inc. For The Earth Corp. - - - - -

Mean $1,024.9 $664.0 $146.8 1.9x 12.8x

Median 270.0 193.3 118.8 1.8x 12.0x

Low 25.0 75.0 30.0 0.6x 9.0x

High 5,769.2 2,266.5 319.5 3.4x 18.1x

$ in millions

pet industry update august 2017 - brooks houghton · pet industry update august 2017. brooks,...

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