Apollo close to $10b buyout of PetSmart

A PetSmart event in Dallas.

Tipped purchase would be largest leveraged deal for a US firm this year after activists urged retailer to sell .

Leon Black's Apollo Global Management is said to be nearing a buyout of PetSmart, the retailer with a market value of US$7.72 billion ($9.92 billion), in what would be the largest leveraged deal for a US company this year.

New York-based Apollo is in the late stage of talks to buy PetSmart for about US$8 billion following an auction process that has been underway for weeks, said a source close to the company who asked not to be identified because the talks were confidential.

Activists have been urging PetSmart to put itself up for sale as the retailer's business has waned. Same-store sales at the pet supply company were flat last quarter after falling in the previous three months for the first time in at least a decade, as competition from Amazon.com and other retailers intensified.

A private equity deal with Apollo would top Blackstone Group's US$5.4 billion purchase of industrial products maker Gates Global in July, data compiled by Bloomberg show.

Buyout firms have held off making purchases this year, as valuations climbed with stock benchmarks that have reached records.

In the US, the value of private equity buyouts tumbled to about US$65 billion so far this year, from US$100 billion in 2013, the data show.

Fran McGill, a spokesman for Apollo at public relations firm Rubenstein Associates, declined to comment. Representatives for PetSmart also made no comment.

Shares of PetSmart have gained 6.8 per cent this year, closing at US$77.67 on Saturday, compared with an 8.3 per cent gain in the Standard & Poor's 500 Index.

Jana Partners, the US$10 billion hedge fund run by Barry Rosenstein, disclosed a 9.8 per cent stake in PetSmart on July 3 and urged the company to seek a sale, improve operating performance and return "significant" capital to shareholders.

PetSmart responded the following week, saying its board "has been reviewing potential changes to the company's capital structure", with a focus on returning capital to shareholders.

That same day Longview Asset Management disclosed a 9 per cent stake in PetSmart and also called for the company to weigh a sale. The two investors are the biggest stakeholders in PetSmart.

PetSmart's high free cash flow yield and low debt relative to earnings open up several ways to boost returns, shareholder Olstein Funds has said. While the retailer could take on debt to buy back shares, a bigger payout could come from a merger with rival Petco Animal Supplies or a buyout by a private equity firm, Credit Suisse Group has said.

The New York Post earlier reported that Apollo was close to buying PetSmart and may have beaten KKR & Co to the deal.

The retailer, which has about 53,000 employees, operates more than 1340 pet stores, as well as 200 in-store boarding facilities for cats and dogs.

Bloomberg