Petco goes public for third time

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.

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."