Mergers and acquisitions (M&A) is naturally a “hot topic” in pet food supply. The past five years have shown a flood of transactions—in some cases, for amazingly strong pricing. The fact is that M&A is still holding steady with aggressive activity today. In the US in particular, pet spending is at an all-time high. Total dollars spent and pricing “per unit” continue to rise. However, trade publications and rumors are starting to suggest that, sometime soon, that velocity may diminish.
Mid-size pet food companies and a 'recession-proof' industry
For middle-market US companies, we don’t believe that is true. The industry carries a powerful mystique as being one of the few spots in the marketplace that seems to have proven “recession-proof.” That makes it an attractive focus for investors. Additionally, US manufacturing for food products is easier for US access and delivery, and is considered superior and safer than distant deliveries from offshore.
Multiples for mid-size pet food companies historically were average to high, relative to other business segments. The average multiple for a US manufacturer in a middle-size range (US$10 million to US$200 million in sales) might provide sales pricing of around 5–7 x EBITDA (earnings before interest, taxes, depreciation and amortization). At the same time, the growing and healthy pet food company might fetch more like a 5.5-6 multiple at the lower edge of the range, up to as much as an 8-9 multiple on the higher end of the range—and even more for the perfect company that gets the fiercest acquisition competition. (We have specific experience with two transactions in 2015, one of which brought 8x EBITDA in pricing and another more than 11x.) Markets continue to be excellent for the leading performers.
Pet food spending clearly remains “hot,” with 2015 pet food spending reaching US$29 billion in the US—a 22.5% increase over 2014. Early indicators are that 2016 trends are continuing the climb.
M&A markets for pet products, coupled with companies that stay on top of specialty trends, have the potential to grow the market and create significant value, according to Deborah Douglas, managing director of Douglas Group. | Courtesy Douglas Group
In spite of this recent history, however, there is word in various publications that the powerful pricing and voracious appetites of buyers must surely be due to subside. Admittedly, it is rare for any industry subset to continue to grow at double-digit paces for more than four or five years in succession. However, for a pet food company of today with a bit of focus in the trending areas going forward, we predict that you may not see any downturn in likely buyer appetites for several more years.
How to sustain industry growth via current and upcoming trends
Companies that focus on healthy and natural pet food trends are clear likely winners. US pet owners have the time and money to insist on higher-quality care. Most pet owners are not first-timers. They have seen and enjoyed dogs in lifelong friendships, often for three to five doggie lifetimes during one human history. They learn more about care and nutrition with each pet generation, and the slightly older owners (the baby boomer-aged consumers) have the means to insist on higher-level care.
High-protein, low-grain or grain-free products have increasing scientific support, also winning consumer loyalties. Pet owners regard their pets, more than ever before, as family members. They seek quality of life and extended life span for their animals today. Higher cost may often be perceived as “well worth it.” Additionally, healthy pet “supplements” have seen impressive growth in the past few years. Once again, this trend is consistent with the focus on supporting quality of life and longevity for our four-legged friends.
Products with new or emerging focus on potential health benefits may be perceived by consumers as worth chasing, even with more limited or difficult to access availability in the marketplace. Twenty years ago, pet owners had a greater tendency to seek the longer-established name brands as a sign of reliability in food for their pets. Today, specialty subsets in retail for focused (often health-oriented) pet products have grown tremendously. Although more difficult for consumers to access, total dollars spent in this venue continue to fare well.
The trends at recent SuperZoo shows alone tell some of the story. The number of exhibitors in the “natural” section increased in 2015 by 30.7% over the prior year. The exhibitor count in “meds/supplements” was up 16.7%. Focus on perceived health benefits for pets continues to climb.
M&A markets for pet products are superb today. Multiples are truly at a record high for growing pet food providers. Companies with a steady eye towards favoring the preferred healthy orientation in new product development have the potential to create greater value today than ever before in history.
More on current pet food market trends
