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Is BC Partners Putting PetSmart Down At A Heavy Price?

Summary

Private equity firm, BC Partners is taking PetSmart, Inc. private after winning the auction in an $8.7 billion deal.

PetSmart is dealing with mounting investor activism and fierce competition is squeezing its profit margins as illustrated in its third quarter results.

The possibility of this leveraged buyout is a big win for shareholders at a time when market valuations are high.

Private equity firm, BC Partners is taking PetSmart, Inc. (PETM: NASDAQ) a retail chain engaged in the sale of specialty pet supplies private in an $8.7 billion deal. This will be the year's largest U.S private equity leveraged buyout deal. Lenders to the deal include Citigroup, Nomura, Jefferies, Barclays and Deutsche Bank.

Longview Asset Management a leading firm in the BC Partners consortium holds a whopping 9.02% in PetSmart as the second-largest outside shareholder and will be counting on its holdings to make the deal as BC Partners will be paying $83 per share for the retailer. This is a 6.86% premium over PetSmart's stock price as at Friday's close. PetSmart shares closed at $77.67.

The buyout price also represents a 39 percent premium to PetSmart's closing price of $59.81 on July 2, the day before shareholders (Jana Partners) called PetSmart to explore a sale.

When compared to the Nasdaq 100 index total return of 36.92%, this is a great bargain for shareholders and a 9.1x EBITDA multiple for the 12 months ending November 2, 2014.

PetSmart is dealing with mounting investor activism at a time when fierce competition from large retailers, including Wal-Mart Stores Inc and Amazon, is squeezing specialty stores as seen in the retailer's reported flat third-quarter net income of 92.2 million as net sales rose 2.6% to $1.7 billion dollars.

Therefore, the possibility of this leveraged buyout is a big win for shareholders at a time when market valuations are bullishly high. The transaction will provides significant value to shareholders and will position the company to capitalize on future growth opportunities as outlined in its 2015 guidance.

The Phoenix-based retailer operates 1,387 stores with about 54,000 employees in the U.S., Canada and Puerto Rico.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.