Woolworths to buy a 55 per cent stake in Petspiration Group for $586m
Woolworths boss Brad Banducci sees a huge opportunity in the pets space and has spent half-a-billion dollars to snap up a stake in Petspiration – owner of PETstock.
Woolworths CEO Brad Banducci has defended his move to spend $586m buying a controlling stake in leading pets business Petspiration, arguing he was not paying “top of the cycle” prices after a pandemic-induced boom in pet ownership, with the business having plenty of runway for future growth.
Mr Banducci said Petspiration, which offers everything pet-related from food to grooming, had an “impressive growth trajectory” and that, while pet ownership spiked during pandemic lockdowns, there was no sign of a slowdown as consumers devoted more time and money to pets, and companion animals such as dogs and cats lived longer.
In his six years as Woolworths CEO, Mr Banducci has built a large shopping list of deals, including the closure of failed hardware experiment Masters, selling EziBuy, demerging its drinks and hotels arm Endeavour and, more recently, buying a stake in food services company PFD as well as Cartology, MyDeal and now Petspiration.
He said on Thursday the latest deal would not be a distraction from Woolies’ core supermarkets arm and was a part of him building the “Woolworths of the future”.
Mr Banducci shaped the acquisition of a controlling stake in Petspiration – which has the PETstock banner, 276 stores, 65 vet clinics and 162 grooming salons – as an opportunity to branch into the $10bn specialty pets sector while also fleshing out a new, larger and more profitable retail ecosystem for Woolworths.
“Firstly, if you look at this group, it has actually had an impressive growth trajectory on the top and bottom line going all the way back to way before Covid, so it has a great growth story behind it,” Mr Banducci told investors on a call after unveiling the deal.
“The growth story has been remarkably consistent over the last 10 years and that continued of course through Covid, and it’s very important to us while it has this amazing, impressive performance trajectory if you look at third-party benchmarks it is on some of the low side of what you see in speciality pets. So we can see material opportunities and, in fact, a material opportunity to not only improve the top line but continue to drive margin accretion.
“Pets are living longer and leading more rich, enjoyable lives and we don’t see this as a peak (cycle), this trend started many years ago and we expect it to continue for many more years.”
Under the deal, Woolworths has made quick use of the $636m it raised from its selldown in liquor retailer and pubs group Endeavour, buying into Petspiration to give it a beachhead into the growing pet services and goods sector in Australia and New Zealand.
Woolworths said that, over the last five years, Petspiration had delivered strong sales growth organically and through regional acquisitions, with sales of $979m for the 12 months to the end of September.
Petspiration founders Shane and David Young, and other existing shareholders, will retain a 45 per cent equity investment in the business. The Young brothers will continue as CEO and managing director, respectively.
Petspiration has an established e-commerce platforms such as Pet.co.nz, a 2.4 million-member loyalty program, and a strong own brand range including brands such as Caribu and Glow.
Woolworths said the transaction was expected to achieve a mid-teens internal rate of return, with identified value creation opportunities to support strong earnings growth. This could include enticing Petspiration’s customers to shop at Woolworths and join its Everyday Rewards program, and complementing Woolworths existing pet insurance business, the second-largest pet insurer in Australia.
During a call with analysts, Bank of America analyst David Errington questioned the financial sense of the acquisition, saying Woolworths was paying about 25-30 times earnings for Petspiration against Woolworths’ current price-to-earnings ratio of 21 times. He argued that shareholders would rather Woolworths use its cash and sizeable reserves of franking credits for a share buyback – at cheaper value – rather than another acquisition in an adjacent retail category.
But Mr Banducci said: “We see it as key to building the Woolworths of the future.”
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