Is Petco’s IPO a Buy?

Petco Animal Supplies may be going public again after confidentially filing with the Securities and Exchange Commission its plans for an initial public offering (IPO)…

Although the private equity owners of the pet supplies leader previously pursued a buyout, the IPO may be a better route to achieve the $6 billion valuation they are reportedly seeking. The market has been friendly toward IPOs of late, and pet care in general has benefited from the panic buying of pet food and supplies brought on by the pandemic.

Yet competition remains intense, and rival retailer Pet Valu, which is also owned by private equity investors, just announced it was ending operations at all 358 stores and warehouses due to struggles encountered during the pandemic. As Petco has also struggled despite being deemed an essential business, let’s see whether its IPO would result in it becoming a flea-bitten stock or an investor’s best friend.

It’s a secret

Petco wasn’t very forthcoming in itsĀ IPO filing announcement, only saying the process would begin after an SEC review and that it had yet to decide how many shares it would issue or at what price. By filing its paperwork confidentially, it doesn’t have to reveal its financial information publicly until about two weeks before the offering.

Confidential IPOs have become popular, with Airbnb, DoorDash, and online retailer Wish all choosing that route this year. Part of a legislative overhaul enacted to help small businesses in 2012, a confidential IPO lets a company prepare for its public debut on its own terms without media or investor scrutiny. It also lets it choose a time when the markets are most supportive.

Bloomberg reports Petco wants a $6 billion valuation, which would provide its private equity owners CVC Capital Partners and Canada Pension Plan Investment Board an ample return on their $4.6 billion purchase price in 2016. It’s not uncommon for such investors to begin their exit strategy at this time, though whether you should buy their stake is another matter.

Like herding cats with a broom

Petco operates more than 1,500 stores in the U.S., Puerto Rico, and Mexico, offering pet care products, veterinary services, an e-commerce presence, and an online health advice service called PetCoach. The company reportedly had $4.4 billion in annual sales at the start of February, or almost 5% of the total $95.7 billion spent in the U.S. on pets.

While the retailer was pressured by the pandemic, it’s…

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