Anchor ads are not supported on this page.

4S Ranch Allied Gardens Alpine Baja Balboa Park Bankers Hill Barrio Logan Bay Ho Bay Park Black Mountain Ranch Blossom Valley Bonita Bonsall Borrego Springs Boulevard Campo Cardiff-by-the-Sea Carlsbad Carmel Mountain Carmel Valley Chollas View Chula Vista City College City Heights Clairemont College Area Coronado CSU San Marcos Cuyamaca College Del Cerro Del Mar Descanso Downtown San Diego Eastlake East Village El Cajon Emerald Hills Encanto Encinitas Escondido Fallbrook Fletcher Hills Golden Hill Grant Hill Grantville Grossmont College Guatay Harbor Island Hillcrest Imperial Beach Imperial Valley Jacumba Jamacha-Lomita Jamul Julian Kearny Mesa Kensington La Jolla Lakeside La Mesa Lemon Grove Leucadia Liberty Station Lincoln Acres Lincoln Park Linda Vista Little Italy Logan Heights Mesa College Midway District MiraCosta College Miramar Miramar College Mira Mesa Mission Beach Mission Hills Mission Valley Mountain View Mount Hope Mount Laguna National City Nestor Normal Heights North Park Oak Park Ocean Beach Oceanside Old Town Otay Mesa Pacific Beach Pala Palomar College Palomar Mountain Paradise Hills Pauma Valley Pine Valley Point Loma Point Loma Nazarene Potrero Poway Rainbow Ramona Rancho Bernardo Rancho Penasquitos Rancho San Diego Rancho Santa Fe Rolando San Carlos San Marcos San Onofre Santa Ysabel Santee San Ysidro Scripps Ranch SDSU Serra Mesa Shelltown Shelter Island Sherman Heights Skyline Solana Beach Sorrento Valley Southcrest South Park Southwestern College Spring Valley Stockton Talmadge Temecula Tierrasanta Tijuana UCSD University City University Heights USD Valencia Park Valley Center Vista Warner Springs

This Dog Was Fixed

— For two years, the stock of retailer Petco Animal Supplies has been a dog because management has been screwing the pooch. Since 2000, it has piled up debt so insiders could make fat and fast bucks. Because it has concentrated on financial finagling, not its business, it has fallen far behind its Phoenix competitor, PetSmart.

Now you have to wonder if Petco's shareholders have the intelligence of a cur -- or a flea. Late last month, these stockholders overwhelmingly approved a debt-financed buyout at a price well below another bid. Petco will be purchased by two groups of investors, Leonard Green and Partners and Texas Pacific Group, that pulled the same stunt six years ago, amassing 600 percent profits as they dumped their stock.

It was a flip job: after buying the then publicly held company with borrowed money in 2000, they took it public again in 2002. By late 2004, Green/Texas Pacific had jettisoned all their shares, which they had given themselves for only 49 cents each. Green/Texas Pacific will certainly flip Petco again: they will sell the company if anyone is dense enough to buy it, or they will bring it out in still another public offering.

This process is called a leveraged buyout, and it makes no economic sense other than to enrich a group of piranhas. All over the country, leveraged buyouts are picking up steam, and some observers, notably the New York Times, are concerned. In a leveraged buyout, financial sharks buy a company with as much as 90 percent debt, usually junk bonds. Often, the buyers pay themselves a succulent dividend. The company goes private for a short time, then goes public again, and the insiders, who have put little of their own money in the deal, get rich quick as they dump their stock.

Sponsored
Sponsored

That's what's been happening at Petco. In 2000, the two buyout groups, Leonard Green and Partners and Texas Pacific Group, bought the company for $600 million, only $190 million of which was their own money. The rest was debt. The company went private and then went public again in 2002, and although it was stumbling from the debt load, the stock soared, and the buyout group dumped its shares for $1.2 billion, amassing a profit of more than 600 percent, according to a suit that has been filed in superior court. The suit unsuccessfully attempted to thwart the recent buyout. Having failed that, it now seeks to get damages of $200 million, according to Darren J. Robbins of Lerach Couglin Stoia Geller Rudman and Robbins.

Petco's shareholders last month went for a $29 offer from this buyout group because the price was 49 percent higher than the stock was selling for when the deal was suddenly announced in mid-July. That's a juicy premium. However, there was a much juicier $33-a-share offer from PetSmart on the table.

Management walked away from that higher offer, claiming that antitrust considerations would delay or perhaps abort the merger. Ah, but PetSmart offered Petco shareholders $3.50 a share if the deal didn't go through. And it was doubtful that the antitrust lads would have blocked this one anyway: together, Petco and PetSmart have about $5.7 billion of the pet supplies industry, estimated to be running near $39 billion annually. That's around 15 percent.

With the $33 offer and a $3.50 consolation bonus, the PetSmart deal was a "win-win" for Petco shareholders, says Robbins. Petco shareholders preferred to lose-lose, apparently not fully cognizant that Leonard Green and Texas Pacific have been using the company as a "personal piggybank," says Robbins, and will do so again in the next flip, probably two years hence.

Petco kept its shareholders in the dark about its pending plans. On July 14, 2006, it suddenly announced that it would be bought by Green and Texas Pacific for cash. The news release did not mention that Green/Texas Pacific had bought the company before. In addition, the release said a special committee of the board had studied "an expression of interest" by a buyer. That was stated in the singular. But on August 11, the shareholders learned in a special proxy that PetSmart in April had offered a $30 to $32 buyout. So that July 14 news release was wrong; there had been two expressions of interest. Shareholders also learned in August that Green/Texas Pacific had made the first bid on March 25 at $26.50 a share. After the Pet- Smart bid of April, the two parties engaged in a bidding battle (usually called a pissing contest), in which each alternately boosted its offer.

Another thing revealed in that August 11 confessional was that before Green and Texas Pacific made the March 25 bid, their partners already had snapped up 3.2 percent of Petco stock. This means that after those partners dumped the last bit of their shares in October 2004 at above $35, they waited while Petco stock plummeted and began snatching up shares again at lower prices. Nice timing for a group that had controlled the company only a few years earlier.

Back in March, Petco management concluded that the initial offer looked good, because investors were skeptical about management's embarrassingly consistent missing of earnings targets. And among other things, Wall Street questioned the company's long-term pricing strategy in its stores. For some time, Petco had been pricing goods too high; that's one thing that motivated big-box retailers like Wal-Mart and Target to put more oomph behind the pet supplies business. Those two, along with grocery stores, were devouring Petco. That's a major reason why Petco shares were almost cut in half after the buyout group sold the last of its stock at $35.60 in October 2004.

In April, May, and June, Petco weighed the offers as they hopscotched upward. The company said it pondered the antitrust question -- a contrived defense against PetSmart. On July 13, the buyout group jumped its bid to $29. That would be $1.8 billion, of which $1.35 billion would be burdensome debt. The next day, Petco announced that it would accept it -- with shareholders unaware of the $33 bid on the table.

Petco's strategy of not revealing the bidding war was not in the spirit of full and timely disclosure. If the bidding battle had become news earlier, some other potential buyers might have surfaced. Shareholders might have received a better deal. The suit alleges that the Petco board and its financial backers violated their fiduciary duties by failing to engage in a process that would maximize shareholder value.

But was Petco brass worried about its shareholders? Ha! If it had cared about them, would it have snubbed the much higher bid? As the lawsuit states, a major reason for Petco's taking the lower bid is that PetSmart refused to say that Petco management, particularly chairman Brian K. Devine and chief executive James M. Myers, would keep their jobs after the acquisition.

And why would PetSmart want to keep Petco's top management? PetSmart's recent earnings have been growing steadily, both quarterly and yearly. That can't be said for Petco. Long-term debt is just 27.2 percent of PetSmart's total capitalization. It's 38.4 percent of Petco's. PetSmart's sales are running at $3.6 billion a year. Petco's are $2.1 billion. Standard and Poor's says PetSmart's sales will grow 12 to 13 percent this year. Petco's will go up 10 percent.

Yet, under the Green/Texas Pacific buyout, Devine can continue on for three years at current remuneration levels. In 2004, he raked in more than $4 million, and that pay level continues, according to the suit. After his employment terminates, he will begin a 20-year consulting contract that will pay him 25 percent of his last year's salary for the first 10 years, and 50 percent of that final year's pay for the last 10 years. He is 64 years old. Seventeen Petco directors and executives get cash payments of a collective $16.6 million.

Sweet, huh? That's why Robbins calls it a sweetheart deal -- self-dealing, breach of fiduciary duty, unjust enrichment at the expense of the shareholders. That's putting it mildly. Requests for comment to three separate Petco officials went unanswered.

Here's something you might be interested in.
Submit a free classified
or view all
Previous article

Finest Art Showcase San Diego, International Summer Organ Festival

Events June 29-July 3, 2024

— For two years, the stock of retailer Petco Animal Supplies has been a dog because management has been screwing the pooch. Since 2000, it has piled up debt so insiders could make fat and fast bucks. Because it has concentrated on financial finagling, not its business, it has fallen far behind its Phoenix competitor, PetSmart.

Now you have to wonder if Petco's shareholders have the intelligence of a cur -- or a flea. Late last month, these stockholders overwhelmingly approved a debt-financed buyout at a price well below another bid. Petco will be purchased by two groups of investors, Leonard Green and Partners and Texas Pacific Group, that pulled the same stunt six years ago, amassing 600 percent profits as they dumped their stock.

It was a flip job: after buying the then publicly held company with borrowed money in 2000, they took it public again in 2002. By late 2004, Green/Texas Pacific had jettisoned all their shares, which they had given themselves for only 49 cents each. Green/Texas Pacific will certainly flip Petco again: they will sell the company if anyone is dense enough to buy it, or they will bring it out in still another public offering.

This process is called a leveraged buyout, and it makes no economic sense other than to enrich a group of piranhas. All over the country, leveraged buyouts are picking up steam, and some observers, notably the New York Times, are concerned. In a leveraged buyout, financial sharks buy a company with as much as 90 percent debt, usually junk bonds. Often, the buyers pay themselves a succulent dividend. The company goes private for a short time, then goes public again, and the insiders, who have put little of their own money in the deal, get rich quick as they dump their stock.

Sponsored
Sponsored

That's what's been happening at Petco. In 2000, the two buyout groups, Leonard Green and Partners and Texas Pacific Group, bought the company for $600 million, only $190 million of which was their own money. The rest was debt. The company went private and then went public again in 2002, and although it was stumbling from the debt load, the stock soared, and the buyout group dumped its shares for $1.2 billion, amassing a profit of more than 600 percent, according to a suit that has been filed in superior court. The suit unsuccessfully attempted to thwart the recent buyout. Having failed that, it now seeks to get damages of $200 million, according to Darren J. Robbins of Lerach Couglin Stoia Geller Rudman and Robbins.

Petco's shareholders last month went for a $29 offer from this buyout group because the price was 49 percent higher than the stock was selling for when the deal was suddenly announced in mid-July. That's a juicy premium. However, there was a much juicier $33-a-share offer from PetSmart on the table.

Management walked away from that higher offer, claiming that antitrust considerations would delay or perhaps abort the merger. Ah, but PetSmart offered Petco shareholders $3.50 a share if the deal didn't go through. And it was doubtful that the antitrust lads would have blocked this one anyway: together, Petco and PetSmart have about $5.7 billion of the pet supplies industry, estimated to be running near $39 billion annually. That's around 15 percent.

With the $33 offer and a $3.50 consolation bonus, the PetSmart deal was a "win-win" for Petco shareholders, says Robbins. Petco shareholders preferred to lose-lose, apparently not fully cognizant that Leonard Green and Texas Pacific have been using the company as a "personal piggybank," says Robbins, and will do so again in the next flip, probably two years hence.

Petco kept its shareholders in the dark about its pending plans. On July 14, 2006, it suddenly announced that it would be bought by Green and Texas Pacific for cash. The news release did not mention that Green/Texas Pacific had bought the company before. In addition, the release said a special committee of the board had studied "an expression of interest" by a buyer. That was stated in the singular. But on August 11, the shareholders learned in a special proxy that PetSmart in April had offered a $30 to $32 buyout. So that July 14 news release was wrong; there had been two expressions of interest. Shareholders also learned in August that Green/Texas Pacific had made the first bid on March 25 at $26.50 a share. After the Pet- Smart bid of April, the two parties engaged in a bidding battle (usually called a pissing contest), in which each alternately boosted its offer.

Another thing revealed in that August 11 confessional was that before Green and Texas Pacific made the March 25 bid, their partners already had snapped up 3.2 percent of Petco stock. This means that after those partners dumped the last bit of their shares in October 2004 at above $35, they waited while Petco stock plummeted and began snatching up shares again at lower prices. Nice timing for a group that had controlled the company only a few years earlier.

Back in March, Petco management concluded that the initial offer looked good, because investors were skeptical about management's embarrassingly consistent missing of earnings targets. And among other things, Wall Street questioned the company's long-term pricing strategy in its stores. For some time, Petco had been pricing goods too high; that's one thing that motivated big-box retailers like Wal-Mart and Target to put more oomph behind the pet supplies business. Those two, along with grocery stores, were devouring Petco. That's a major reason why Petco shares were almost cut in half after the buyout group sold the last of its stock at $35.60 in October 2004.

In April, May, and June, Petco weighed the offers as they hopscotched upward. The company said it pondered the antitrust question -- a contrived defense against PetSmart. On July 13, the buyout group jumped its bid to $29. That would be $1.8 billion, of which $1.35 billion would be burdensome debt. The next day, Petco announced that it would accept it -- with shareholders unaware of the $33 bid on the table.

Petco's strategy of not revealing the bidding war was not in the spirit of full and timely disclosure. If the bidding battle had become news earlier, some other potential buyers might have surfaced. Shareholders might have received a better deal. The suit alleges that the Petco board and its financial backers violated their fiduciary duties by failing to engage in a process that would maximize shareholder value.

But was Petco brass worried about its shareholders? Ha! If it had cared about them, would it have snubbed the much higher bid? As the lawsuit states, a major reason for Petco's taking the lower bid is that PetSmart refused to say that Petco management, particularly chairman Brian K. Devine and chief executive James M. Myers, would keep their jobs after the acquisition.

And why would PetSmart want to keep Petco's top management? PetSmart's recent earnings have been growing steadily, both quarterly and yearly. That can't be said for Petco. Long-term debt is just 27.2 percent of PetSmart's total capitalization. It's 38.4 percent of Petco's. PetSmart's sales are running at $3.6 billion a year. Petco's are $2.1 billion. Standard and Poor's says PetSmart's sales will grow 12 to 13 percent this year. Petco's will go up 10 percent.

Yet, under the Green/Texas Pacific buyout, Devine can continue on for three years at current remuneration levels. In 2004, he raked in more than $4 million, and that pay level continues, according to the suit. After his employment terminates, he will begin a 20-year consulting contract that will pay him 25 percent of his last year's salary for the first 10 years, and 50 percent of that final year's pay for the last 10 years. He is 64 years old. Seventeen Petco directors and executives get cash payments of a collective $16.6 million.

Sweet, huh? That's why Robbins calls it a sweetheart deal -- self-dealing, breach of fiduciary duty, unjust enrichment at the expense of the shareholders. That's putting it mildly. Requests for comment to three separate Petco officials went unanswered.

Comments
Sponsored
Here's something you might be interested in.
Submit a free classified
or view all
Previous article

8 Reasons To Get Your Children A Trampoline

Next Article

Finest Art Showcase San Diego, International Summer Organ Festival

Events June 29-July 3, 2024
Comments
Ask a Hipster — Advice you didn't know you needed Big Screen — Movie commentary Blurt — Music's inside track Booze News — San Diego spirits Classical Music — Immortal beauty Classifieds — Free and easy Cover Stories — Front-page features Drinks All Around — Bartenders' drink recipes Excerpts — Literary and spiritual excerpts Feast! — Food & drink reviews Feature Stories — Local news & stories Fishing Report — What’s getting hooked from ship and shore From the Archives — Spotlight on the past Golden Dreams — Talk of the town The Gonzo Report — Making the musical scene, or at least reporting from it Letters — Our inbox Movies@Home — Local movie buffs share favorites Movie Reviews — Our critics' picks and pans Musician Interviews — Up close with local artists Neighborhood News from Stringers — Hyperlocal news News Ticker — News & politics Obermeyer — San Diego politics illustrated Outdoors — Weekly changes in flora and fauna Overheard in San Diego — Eavesdropping illustrated Poetry — The old and the new Reader Travel — Travel section built by travelers Reading — The hunt for intellectuals Roam-O-Rama — SoCal's best hiking/biking trails San Diego Beer — Inside San Diego suds SD on the QT — Almost factual news Sheep and Goats — Places of worship Special Issues — The best of Street Style — San Diego streets have style Surf Diego — Real stories from those braving the waves Theater — On stage in San Diego this week Tin Fork — Silver spoon alternative Under the Radar — Matt Potter's undercover work Unforgettable — Long-ago San Diego Unreal Estate — San Diego's priciest pads Your Week — Daily event picks
4S Ranch Allied Gardens Alpine Baja Balboa Park Bankers Hill Barrio Logan Bay Ho Bay Park Black Mountain Ranch Blossom Valley Bonita Bonsall Borrego Springs Boulevard Campo Cardiff-by-the-Sea Carlsbad Carmel Mountain Carmel Valley Chollas View Chula Vista City College City Heights Clairemont College Area Coronado CSU San Marcos Cuyamaca College Del Cerro Del Mar Descanso Downtown San Diego Eastlake East Village El Cajon Emerald Hills Encanto Encinitas Escondido Fallbrook Fletcher Hills Golden Hill Grant Hill Grantville Grossmont College Guatay Harbor Island Hillcrest Imperial Beach Imperial Valley Jacumba Jamacha-Lomita Jamul Julian Kearny Mesa Kensington La Jolla Lakeside La Mesa Lemon Grove Leucadia Liberty Station Lincoln Acres Lincoln Park Linda Vista Little Italy Logan Heights Mesa College Midway District MiraCosta College Miramar Miramar College Mira Mesa Mission Beach Mission Hills Mission Valley Mountain View Mount Hope Mount Laguna National City Nestor Normal Heights North Park Oak Park Ocean Beach Oceanside Old Town Otay Mesa Pacific Beach Pala Palomar College Palomar Mountain Paradise Hills Pauma Valley Pine Valley Point Loma Point Loma Nazarene Potrero Poway Rainbow Ramona Rancho Bernardo Rancho Penasquitos Rancho San Diego Rancho Santa Fe Rolando San Carlos San Marcos San Onofre Santa Ysabel Santee San Ysidro Scripps Ranch SDSU Serra Mesa Shelltown Shelter Island Sherman Heights Skyline Solana Beach Sorrento Valley Southcrest South Park Southwestern College Spring Valley Stockton Talmadge Temecula Tierrasanta Tijuana UCSD University City University Heights USD Valencia Park Valley Center Vista Warner Springs
Close

Anchor ads are not supported on this page.