Chewy/BC Partners: golden retriever
A absurd IPO market can solve a private equity/hedge fund fight
Negotiations between private equity firms and creditors are stressful. Emotional support animals are needed. BC Partners, without a shaggy labrador to hug, depended on red-hot online pet supply company Chewy, owned by its bricks-and- mortar chain PetSmart.
Chewy priced its initial public offering at $22 a share late on Thursday. Those shares promptly started trading on Friday at nearly $40, implying an enterprise value of a whopping $15bn. Just a year ago, hedge funds owning PetSmart debt were brawling with BC Partners over accusations that the private equity firm had fraudulently seized the value of Chewy from the grasp of loan and bondholders. But a hot IPO market means that even vastly unprofitable unicorns such as Chewy have an exit route, retrieving (as it were) a hopeless situation.
BC Partners acquired Petsmart in 2015 for $9bn. It then added Chewy for $3bn in 2017. The core PetSmart has suffered from the decline of traditional physical retailing. The acquisition of Chewy seemed like a reasonable hedge. A year ago, when Chewy’s private valuation was around $4.5bn, BC Partners executed two manoeuvres to,in effect, shift some of Chewy’s value to subsidiaries, out of the reach of creditors. PetSmart’s junior bonds traded down to below 50 cent on the dollar. A recent legal settlement between BC and hedge funds allowed the IPO to go forward.
Hard-nosed, cynical private equity and hedge fund types must be shocked by the value public equity investors are putting on Chewy. Its revenue in 2018 was $3.5bn. That is 50 times greater than five years ago but losses have also mounted.
As a part of the listing, BC Partners is selling $800m of its stake. The litigation settlement calls for Petsmart to commit to paying off debt. The next question is whether Chewy’s public shareholders will grow uneasy with its business model before PetSmart can fully monetise its investment. For now, however, Petsmart’s dog days are over.