Future mergers and acquisitions shaped by pandemic buying

Business movements in the pet food industry may follow the restrictions in people’s ability to move about.

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(image by Andrea Gantz)
(image by Andrea Gantz)

Dog, cat and other pet owners shifted buying channels rapidly as the current COVID-19 pandemic limited brick-and-mortar buying options to local pet food retailers. Business movements in the pet food industry likewise may follow the restrictions in people’s ability to move about.

“People used to buy their pet food along with other groceries on the way to and from work,” Mark Warren, chairperson and CEO of Dane Creek Capital said.

As more people work from home, they continue to buy near their workplace but now that means a local pet store or online, Warren said. That localization trend may continue post-pandemic, providing opportunities to regional pet food companies like the various raw dog and cat food brands under Dane Creek’s umbrella. In the past several years, Dane Creek has acquired numerous raw pet food companies, including Tollden Farms in late March 2020 as the pandemic shut down economies worldwide. Following that transaction, Warren said he felt confident about the pet food industry during the pandemic.

A month later, he said he still feels that way. The raw pet food companies owned by Dane Creek haven’t experienced ingredient shortages. Although prices for protein sources have gone up slightly, Dane Creek's brands haven't had to increase retail prices. To the contrary, the raw pet food brands have offered discounts to consumers and retailers during the pandemic, Warren said. Like many other pet food companies, Dane Creek’s brands saw a sales surge during the first quarter of 2020.

Pet food industry mergers and acquisitions post-pandemic

Mergers and acquisitions in the pet food industry will continue during and after the pandemic, but their character may change as buyers look for brands that can tap into the new normal of e-commerce, remote work and social distancing.

“The pandemic has changed our traffic patterns and as a result changed our purchasing patterns,” said Bryan Jaffe, managing director of Cascadia Capital. “Lacking access to physical retail, we order online. Wanting to avoid an incremental trip, we pursue one-stop shopping solutions. Near-term consolidation will be driven by these realities. Buyers will look to acquire solutions who have access to the categories and channels where growth is evident. Additionally, supply chain realities will also cause changes to consolidation thematics. As an example, a pet food brand who may have lost sales due to 'out of stocks' or supplier constraints may look to move their business to someone who can best mitigate these risks. This will change how buyers in the category think about M&A.”

“Ultimately, if the overall economic situation hinders consumers purchasing power, they are likely to pursue solutions that offer better value," Jaffe said.  "Private label offerings tend to grow at elevated rates during recessionary periods. If that is the case, this could impact the type of companies acquirers target in thinking about consolidation."

“Companies whose M&A strategies are tied to public equities are likely to pause or rethink their M&A priorities given accretion/dilution considerations,” Jaffe said. “Debt-burdened companies, both public and private, who may have seen their sales and profits decline will also be constrained with respect to ability to pay in competitive auctions. This will better position private equity funds to increase their percent of transaction volume given their access to capital.”

The ongoing economic repercussions of the pandemic will affect more than Wall Street. The valuation of publicly traded companies influences that of privately held ones as well, Warren said. Dane Creek intends to continue their strategy of acquisitions while minding the pet food buying trends influenced by the pandemic.

 

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