BC Partners breaks America

In the last gasps of 2014 pan-European buyout house BC Partners led a consortium offer on US pet product retailer PetSmart in one of the largest transactions of the year.

The firm and 30 of its limited partners, including CDPQ, GIC and StepStone, offered $83 per share to take the company private in a deal valuing the retailer at $8.7 billion.

The transaction completed in March 2015 and less than a year later PetSmart announced an $800 million distribution to its equity holders.

The timing of this distribution could not be better for BC Partners, which is currently in market seeking €7 billion for its 10th buyout fund. Not only is it advantageous to be returning capital to its existing investors, but it also vindicates the firm’s relatively nascent US strategy and its capacity to furnish its investors with ample co-investment opportunities.

In fact, the 2011-vintage €6.68 billion BC European Capital IX (BCEC IX) is understood to have seen LP co-sponsorship and co-investment totalling €2.8 billion to date, including transactions on both sides of the Atlantic, such as its $6.5 billion acquisition of US cable operator Suddenlink alongside CPPIB, and its $1.3 billion acquisition of French-headquartered animal identification business Allflex.

The transaction also neatly shows off the firm’s operational capabilities. The distribution comes not from a recapitalisation but from cash generation within the business, which is performing beyond expectations, according to a source with knowledge of the matter.

Since the acquisition, BC Partners has actually reduced PetSmart’s net debt to 5.5x EBITDA from 6.4x EBITDA at investment. In May 2015 part of the company’s loan package was also repriced, which resulted in cost savings of $70 million in annual interest expenses.

Post-acquisition, the firm installed retail industry veteran Michael Massey as president and chief executive officer with a mandate to restructure the business and overhaul its management team.

BC Partners and Massey put together a value creation plan focused on both short-term improvements – including improving procurement and product sourcing – and long-term initiatives, such as tailored product offerings.

But some market participants are sceptical about BC Partners’ ability to compete in the US market – or indeed whether a fund with “European” in its name should be committing so much of its capital on the other side of the pond.

While its first US transaction – a $350 million investment in Office Depot in 2009 – and its 2010 investment in healthcare cost management solutions business MultiPlan put in a solid performance, the firm has yet to exit professional services business Teneo – an investment made in 2014 – and its investment in Hamilton Sundstrand Industrial (now Accudyne Industries) is understood to be valued at less than 1x.

For-profit school ATI Enterprises, a 2009 investment, reportedly filed for bankruptcy in 2014 listing debt of $500 million and assets of less than $50,000 after paying $3.7 million over allegations it submitted false claims for student financial aid. 

But its most recent US investments appear to be performing well. A partial exit from fellow Fund IX portfolio company Suddenlink after two-and-a-half years in a deal valuing the business at around $9.1 billion delivered cash proceeds of $960 million and a vendor note of around $200 million to BCEC IX and CPPIB. The sale of the 70 percent stake produced an implied return on initial investment of around 2.3x in euros.

A hefty distribution from PetSmart will likely assuage any further doubts.