Australia’s largest grocery retailer, Woolworths (ASX: WOW), has agreed to purchase a 55% stake in specialist pet food, accessories, and service retailer Petspiration for a cash offer of $586 million. The transaction is subject to the relevant approvals from the Australian Competition and Consumer Commission (ACCC) and the New Zealand Commerce Commission (NZCC). The Petspiration Group encompasses various brands, including PETstock AU, Caribu, and Glow, among others, providing a diverse range of animal services across Australia and New Zealand. Petspiration is Australia’s second-largest pet retailer (behind Pet Barn), boasting a physical presence of 276 stores, thriving e-commerce platforms, and a 2.4-million-member strong loyalty programme.
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With Petspiration Group’s net debt amounting to $670 million, the transaction implies an enterprise value of approximately $1.7 billion. The acquisition will primarily be financed through WOW’s recent sale of a 5.5% stake in the Endeavour Group (ASX: EDV), which yielded the company $636 million. Woolworths Group CEO Brad Banducci remarked on the acquisition, “Speciality pet is a large and growing retail segment in which we have a limited presence. We are delighted to be investing alongside founders Shane and David Young in Petspiration, the number two player in the segment.”
The existing shareholders of Petspiration will retain a 45% stake in the business, with the current CEO and Managing Director maintaining their positions in managing the company under the Woolworths Group. As per the transaction’s terms, Petspiration will be placed under a separate board and governance structure.
Woolworths Gains Exposure to Specialty Pet Sector through Acquisition
The acquisition grants Woolworths access to the specialty pet sector, currently valued at $10 billion, which is a logical move considering the high rate of pet ownership across Australia and New Zealand. According to the AFR, dog ownership rose 25% between 2019 and 2022, while cat ownership skyrocketed by a staggering 43% in the wake of the Covid-19 pandemic. At present, nearly 70% of Australian households own a pet, and the average lifespan of pets has almost doubled over the past decade due to increased spending on animal nutrition and healthcare.
As a relatively mature and low-growth business, this acquisition offers WOW a significant opportunity to expand its earnings by catering to its customers’ pet needs and diversifying its earnings mix away from the grocery sector. We view this acquisition as a logical entry into the growing sector, as WOW will directly benefit from Petspiration’s expertise, which would have been lacking had the retailer expanded into the sector organically. Moreover, Petspiration’s loyalty programme is likely to be integrated into WOW’s “Everyday Rewards” programme. This additional customer data will give WOW a considerable boost, ultimately providing further insights into its customers and their spending habits. These insights have the potential to deliver more targeted promotional campaigns that will drive customer retention and spending across the group.
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At the same time, Petspiration will also benefit from Woolworths’s large customer base and loyalty programme. This is expected to drive an increase in earnings as WOW begins to focus a portion of its promotional activities on Petspiration’s side of the business. In light of Petspiration’s e-commerce footprint, the pet retailer will now be able to leverage WOW’s existing systems and expertise to drive growth in its own e-commerce platforms. This will likely be supported by the customer insights generated by WOW’s customer loyalty programme. Operationally, Petspiration is expected to reap substantial benefits from WOW’s ownership, leveraging their expertise in running such a large and operationally complex business. Cost synergies will thus be driven by the increased economies of scale within the Woolworths group, which will consequently reduce Petspiration’s costs in numerous areas, such as production, supply chain, and logistics. Therefore, from a synergies standpoint, it is abundantly clear that the overall transaction is mutually beneficial to both parties involved.
