​Private equity heats up retail

​Private equity heats up retail

​Private equity heats up retail La Caisse is among the buyers of world’s largest specialty pet retailer. The $8.7 billion deal to buy PetSmart is the largest private equity deal in 2014. Are more to come?

Paying $83 per share or 9.1 times EBITDA, UK private equity firm BC Partners, along with limited partners that include Quebec’s pension fund, see upside in the Phoenix-based retailer despite recent quarterly earnings reports that suggest its growth has come to a grinding halt.

Brick-and-mortar retail has taken it on the chin in recent years so yesterday’s deal announcement gives hope to many retailers with clean balance sheets whose businesses are in need of a little nudge.

Credit Suisse analyst Seth Sigman believes, “The strong support for PetSmart from long-term investors may provide another reason for the market to reconsider the outlook and the options to realize the potential value in these higher quality retail concepts.

He’s talking about mature concepts such as Dick’s Sporting Goods, Best Buy, Pier 1, and Bed Bath and Beyond. “With a little nudge and some catalyst for change, these overlooked names could generate significant returns for investors.”

If you’re shorting retail at the moment you might want to reconsider.

North of the border it’s worth noting that firms such as Canadian Tire are trading at prices near all-time highs. As of December 15 its enterprise value is 10.6 times its trailing 12-month EBITDA, yet its operating margin is lower than PetSmart’s and most of the other names mentioned previously.

A second key takeaway from this deal?

You might want to rotate some of your clients out of Canadian names such as Canadian Tire, Dollarama and even Alimentation Couche-Tard into some of the better known concepts south of the border.

With private equity paying a hefty price for PetSmart, it’s very possible 2015 could be a strong year for investors interested in retail.