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This old dog is not learning new tricks. Petco, the San Diego–based pet supplies retailer, yesterday (August 17) announced plans to go public for the third time, but the company itself will get no proceeds of the stock offering and is carrying a huge debt load.

There is definitely a doggy odor about this string of going public in 1994, going private in 2000, going public in 2002, going private in 2006, and now intending to go public again in 2015.

This is part of the private-equity process — usually called a "leveraged buyout." Public companies are brought private, then loaded up with additional debt, and brought public again. Those making the buyouts normally are the only ones who profit from this financial engineering. In most cases, the debt-laden company is worse off.

Two private-equity groups have been behind the Petco maneuvers. They are Texas Pacific (now called TPG Funds) and Leonard Green and Partners (now called Green Equity Investors). Before this upcoming offering, TPG owns 46.8 percent of Petco and Green Equity owns 37.5 percent. Now there two other buyout operations, Abu Dhabi Investment Authority (11.9 percent) and FS Equity Parters (6.7 percent).

The buyout firms are selling an as-now-undetermined number of shares. The preliminary prospectus states that Petco itself "will not receive any of the proceeds for the sale of shares by selling shareholders."

That preliminary prospectus warns that an investment in Petco (now called Petco Holdings) involves "a high degree of risk." The company has $2.32 billion of debt and admits in the prospectus, "Our substantial indebtedness could adversely affect our cash flow" and increase the company's vulnerability to economic conditions.

Petco first went public in 1994. In 2000, Green and Texas Pacific bought the company for $600 million but put only $190 million of their own money in the pot. The rest was debt. The company went public again in 2002. The stock zoomed and the buyout groups dumped their shares for $1.2 billion, piling up a profit of 600 percent, according to a lawsuit filed by the firm now known as Robbins Geller Rudman and Dowd.

Darren Robbins

LinkedIn photo

In 2006, Petco's major competitor, PetSmart, offered to buy Petco for $33 a share. Petco management feared PetSmart might clean house. So, Petco turned to Green and Texas Pacific again and took their offer for much lower — $29 a share. Darren Robbins of the Robbins Geller firm complained about the lower price and said the two buyout firms had been using Petco as a "personal piggy bank."

Yesterday's news releases and most news coverage did not mention that Petco was going public for the third time. In fact, yesterday's news release by Petco referred to its upcoming "initial" public offering. Initial?

The 2006 lawsuit by Robbins Geller was settled for $16 million. I asked Robbins today what he thought about a third public offering by Petco. He said, "We are hopeful that given its prior experiences, Petco and its senior insiders are sensitive to the importance of making full and fair disclosures in connection with the company's efforts to sell securities to public investors."

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Comments

Visduh Aug. 18, 2015 @ 12:03 p.m.

Many people are sentimental about their pets. Petco is where many of them go for pet supplies and pet food. So, when that "nice store" goes public, they may think that it would be a good investment. Many folks, lacking investment advice, will just buy into the IPO, and assume they "done good." They'll find out they did just the opposite.

Don, I learned about this move within the past couple days, and wondered when/if you would make a blog post. I think Petco was one of your best examples of the abuse of the LBO and then subsequently taking the company public. The problem is that they have learned that they can get away with this kind of junk and profit from it. Mervyn's went out of business because it carried a huge debt and couldn't afford to stock the stores properly

As to whether this should be called an IPO, you make a good point. But is there any other common term for an offering like this one? I suppose it could be called a public offering, but then Wall Street would be scratching its collective head, wondering why it had that term used. It's the "initial" public offering this time around.

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Don Bauder Aug. 18, 2015 @ 2:08 p.m.

Visduh: There is another word for initial public offering (IPO). Back in the 1960s, we called an IPO a "new issue." But that wouldn't be so applicable to Petco either, because of that word "new."

Frankly, I don't know of any other company that has gone public three times. I suppose there are some. As I have said on this blog many times, I am generally contemptuous of private equity operations, leveraged buyouts, and related financial engineering. Best, Don Bauder

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sassinsandiego Aug. 18, 2015 @ 3:43 p.m.

Hey Don: Safeway/Albertsons? That said, for a public offering to be truly successful the company typically needs to be selling something that is highly differentiated and unique. IMHO, brand differentiation is one of Petco's biggest weaknesses. I dunno about you, but my dawg can't discern any real difference between a Petco and Petsmart store. Cheers.

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Don Bauder Aug. 18, 2015 @ 4:21 p.m.

sassinsandiego: And pet specialty chains such as Petco and PetSmart only have 24 percent of the market. That's not as big as discount stores but larger than grocery stores. Best, Don Bauder

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Ponzi Aug. 19, 2015 @ 8:06 p.m.

IPO, LBO, IPO, LBO, IPO... it's like watching a dog chase its tail.

And with all that debt the stock will be a dog.

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Don Bauder Aug. 20, 2015 @ 9:46 a.m.

Ponzi: IPO, LBO = weapons of mass destruction. Petco Holdings warns in its preliminary prospectus that its stock is very speculative. Best, Don Bauder

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