There are a number of private equity firms that submitted their final round bids for the PetSmart (NASDAQ:PETM) that were due Friday the 5th. Since my first article about the buyout, PetSmart's stock price has already risen by ~10%. The private equity firms involved now include Apollo, BC Partners, and a joint bid between KKR and Clayton, Dubilier, and Rice.
Where Will The Stock Be Bought?
In my first valuation analysis, I believed that a $90 buyout was not out of the question, given PetSmart's strong fundamentals and undervaluation. The only figure I have seen leaked around the deal is that the debt load will be around $6B. I will use this figure to reverse engineer where the stock will be bought out.
Currently the buyout is facing headwinds as regulators closely watch the deal's financing. Because of this fact, I believe that the company's buyer will put in 35% equity. This means that 65% of the deal will be purchased with $6B of debt, and we can use this to derive a value for PetSmart.
Source: S&P Capital IQ
The above analysis yields a buyout target price of around $90 per share, which was in line with my previous valuation analysis. The 35% equity estimate is valid given the regulatory pressures of the deal. Also, with $6B in debt, PetSmart will be levered 6.3x LTM EBITDA. Regulators have targeted all deals levered past 6x EBITDA, thus a buyer will likely put in a larger % of equity into the deal, to soothe this risk. A $90 buyout price is still 14% higher than PetSmart's most recent close, which still gives investors a chance for a decent amount of upside in the near future.
Why The Deal Will Get Done
While regulators have been watching the PetSmart deal very closely, I believe the deal will still go through for a number of reasons. Both the private equity firms and the investment banks, will be extremely hungry to get their hands on the biggest LBO of 2014. The banks will be interested in the large amount of fees they can generate, and the private equity firms are sitting on a large amount of dry powder. While there will be a substantial amount of leverage on the company post-closing, I believe that the company's strong FCF, high EBITDA margins, and low capital expenditures will lead to regulators letting the deal go through based on strong enough fundamentals to combat the large debt load.
PetSmart's stock price still has upside given the final round bids of its potential buyout. A reverse engineered valuation yields 14% upside in the near future based on a leaked $6B debt figure. The deal has faced scrutiny, but is still likely to go through based on benefits for all interested parties, and strong fundamentals that will combat a 6.3x debt load on the company.
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