Think private equity and small furry animals are probably not the first image to spring to mind.
Yet Bridgepoint, the mid-market buy-out firm, has shown that selling hamsters, guinea pigs, rabbits, and birds can be a profitable enterprise.
Matt Davies, chief executive of Pets at Home, admits that most people thought Bridgepoint had overpaid when it bought the pet store chain in 2005, for £230m in a highly competitive auction.
The bid, worth 10 times that year’s earnings before interest, tax, depreciation and amortisation, looked ambitious. However, it now looks a smart move, after the company’s ebitda doubled from £23m in 2005 to £47m in the year to March 2007.
Pets at Home was acquired from Anthony Preston, the founder, who kept a holding of about 10 per cent and stayed on the board as a non-executive director.
Bridgepoint’s Guy Weldon says there were several obvious ways to improve performance: “It was about broadening horizons and embracing best practice to unlock more of the potential.”
First, management was strengthened. Two Bridgepoint partners joined the board and Luke Mayhew, a former John Lewis executive, became chairman.
Bridgepoint created the positions of marketing director, e-commerce director, and buying director. After 18 months, the company changed its chief financial officer – a common feature of leveraged buy-outs.
“The business had been developing at a tremendous pace and one thing we thought we should strengthen was the financial direction,” says Mr Weldon.
“Our role is about agreeing the priorities and making sure it has the resources, in terms of capital and management. But making it happen is down to the management team,” he admits.
The second move was to accelerate the pace of new store openings from three or four a year to nearer 20. From 147 stores in 2005, Pets at Home is expected to have 215 by the end of the year, and Mr Weldon says it has potential for 350-400
The third pillar of Bridgepoint’s strategy has been to boost gross margins by cutting costs, improving productivity and increasing like-for-like sales growth.
The store introduced its own-brand goods, which could be sold at a higher margin.
It negotiated better deals with suppliers and increased the number of products, such as pet foods and accessories, that were imported from cheaper Asian suppliers.
Mr Weldon says the company has invested more than £50m to fund the store roll-out and double the size of its distribution centre in Stoke.
For Mr Davies, the biggest change since Bridgepoint took over has been the increased pace of innovation.
“The focus has been on driving strong like-for-like sales growth by wowing our customers,” says the former Rothschild banker who joined in 2001 as finance director and became chief executive in 2004.
Product innovations have included fashion leads for dogs, a range of nutritional pet foods, flat-pack rabbit hutches that allow customers to take bigger models home in their cars, and Christmas presents and stockings designed for pets.
This policy has helped to lift sales from £220m two years ago to £350m expected this year. Diversification of the stores is set to increase, with plans to roll out a pet grooming service and expand the vet business.
“Fundamentally, it is about whether you can have a good relationship with your majority shareholder,” says Mr Davies.
“It is great to be able to pick up the phone and say, ‘Here are my thoughts, what do you think?’”
He rejects the idea that private equity buyers burden their purchased company with too much debt.
Pets at Home’s gearing has fallen to 4.3 times – its lowest level since the buy-out – and Mr Davies says it is subject to “sensitivity tests” to check how it would stand up to a slide in earnings.
Both men point to the powerful role in improving performance played by management’s investment in the company.
However, there seems to be a slight difference of opinion on whether the company’s next move should be to float or be bought by another private equity firm.
“There are a lot of work streams under way that we are not going to see the full value of before we sell,” says Mr Weldon. “I’m sure private equity will be interested in taking it on.”
But the Pets at Home boss says: “It is definitely one of the advantages of a listed company – especially in a consumer-facing business – is that you get talked about much more. This company could be a very attractive flotation opportunity as well as a private equity target.”