Is This the Next Big Retailer to Melt Down? Its Bonds Crashed

The PE-firm-owned brick-and-mortar retailer grapples with its fate.

PetSmart, the largest brick-and-mortar pet supply and services retailer in the US and Canada, with 55,000 employees, 1,600 big-box stores, 200 pet boarding facilities, and $8.7 billion in revenues in fiscal 2017, has a little problem: $8.1 billion in debt.

And you guessed it: Half of this debt is the result of its leveraged buyout by a private equity firm. When a company gets acquired via an LBO, it is the company itself that ends up carrying the debt used to acquire it. Hence the phrase “leveraged” buyout. In 2014, “activist” hedge funds took a stake in the publicly traded shares and started clamoring for a sale. PE firms took notice. A bidding war broke out – a bidding war for a brick-and-mortar retailer, as if they’d never even heard of e-commerce!

BC Partners in London, with zero experience in US retail, won the bidding war with its ludicrous $8.7 billion offer. It was the most expensive retail LBO ever. After the deal closed in 2015, BC Partners loaded PetSmart up with debt and extracted a special dividend of $800 million. With this dividend, BC Partners likely made its money, no matter what happens to PetSmart.

And then, in a move of desperation and in a sign that the credit market was boiling over with blind enthusiasm for anything junk-rated, PetSmart borrowed another huge load of money to buy its online competitor Chewy.com for $3.4 billion. It was the most expensive acquisition of an online retailer ever.

In its last SEC filing as a publicly traded company in February 2015, PetSmart reported $343 million in cash and a mere $560 million in debt. Now it has 15 times as much debt — $8.1 billion — and some of this debt is getting into painful trouble.

No one in bond-land will easily forget the epic collapse of Toys “R” Us bonds. They were still trading above par at 101 cents on the dollar in late August 2017. By September 18, they’d plunged 88% to 12 cents on the dollar, as bankruptcy rumors for the PE-Firm owned LBO queen became reality.

When Toys “R” Us filed for Chapter 11 bankruptcy, it assured everyone it would keep doing business as normal. The bonds jumped to 40 cents on the dollar by October 27, and those who’d had the balls to dive in at 12 cents made a bundle if they were able to unload them in late October (however, with little liquidity in this kind of bond, it can be hard to unload).

But, after a series of plot twists, Toys “R” Us is now liquidating, and those bonds traded today at 8 cents on the dollar (chart via FINRA/Morningstar):

PetSmart bondholders likely witnessed this sordid spectacle too. And now they’re smelling a rat in their own house. PetSmart’s 8.875% senior unsecured note, due June 2025, last traded at 48.6 cents on the dollar, down 51% from a year ago, which gives the bond a yield of 24.6%. The smell of default hangs in the air:

On April 27, S&P Global’s LCD reported that, according to sources, in its fiscal fourth quarter, PetSmart booked disappointing “adjusted” EBITDA (a form of pre-everything cash flow) of about $203 million on about $2.5 billion in revenue.

But the overall pet business, while not exactly booming, has been growing in line with other retail spending. According to the American Pets Products Association, consumers spent $69.5 billion on pet products in 2017, up 4.1% from a year earlier:

But as in other retail segments, sales in brick-and-mortar stores are declining while online sales are booming. And PetSmart has 1,600 big-box stores.

On May 15, Moody’s downgraded PetSmart by two notches to Caa1, deep into junk – after having already downgraded it on January 5:

The downgrade reflects PetSmart’s continued weak operating performance in its core brick and mortar business, which is well below our expectations. We do not expect its credit metrics, already weakened by the Chewy acquisition, to demonstrate any meaningful improvement in the next 12 months.

[W]e estimate Chewy will remain EBITDA negative for at least the next 12 months and our negative outlook reflects the uncertainty around PetSmart’s ability to change the negative sales and margin trends in its brick and mortar operations and reducing it unsustainably high leverage considering the continued losses at Chewy and the increasingly competitive business environment.

Moody’s slapped on a negative outlook, reflecting “the higher risk of a distressed exchange.” This could be a debt restructuring where creditors would get a haircut.

It doesn’t help that PetSmart has trouble with its CEOs. After the LBO in 2015, the old CEO was discarded and Michael Massey was installed as new CEO. In August 2017, Massey quit. In March 2018, Chewy’s CEO Ryan Cohen quit. Then finally, on May 21, 2018, after nine months without CEO, PetSmart announced it had nailed down J.K. Symancyk as CEO, to fill Massey’s slot.

PetSmart is another example — in a seemingly endless series — of a PE-firm-engineered LBO that is strangling a brick-and-mortar retailer. The transition of consumer preference to e-commerce has made life exceedingly difficult for all brick-and-mortar retailers. But the transition becomes fatal for retailers that are burdened with debt, and where therefore cost-cutting is the rule rather than spending on stores and masterful merchandising, which is what’s required to retain customers.

What’s really amazing is that investors and lenders were still blind to all this as late as 2015 – when the brick-and-mortar meltdown was already in the works – and that they were willing to fund these shenanigans.

Only about half of retail is under attack from e-commerce, but that half is getting crushed. Brick & Mortar Meltdown Pummels These Stores the Most 
 

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

 

  102 comments for “Is This the Next Big Retailer to Melt Down? Its Bonds Crashed

  1. Scott
    May 25, 2018 at 8:13 pm

    While the big names get the headlines, there are smaller retailers that get acquired by PE, leading them to bankruptcy. Last month Bertucci’s, a Boston-based pizza chain, declare bankuptcy.

    https://www.usatoday.com/story/money/2018/04/16/bertuccis-chapter-11-bankruptcy/519661002/

    The relevant quote:
    “The chain, which is owned by investment firm Levine Leichtman Capital Partners, warned that without the deal it faces a serious risk of liquidation.

    The company currently employs more than 4,200 workers. It has about $119 million in debt.”

    • Gershon
      May 26, 2018 at 9:40 am

      Having worked in a family owned restaurant during my college days, and seeing how the deck is stacked against the little guys, I refuse to eat at any corporate chain restaurant.

    • Cal
      May 27, 2018 at 12:24 pm

      Yaaay! I love it when small-business killing corporations go belly up!

      Screw them, to and including Starbucks, Marie Calendars and all the other money sucking labor abusing parasites that have turned Main Street into a driveway to the shopping mall.

      Patronize small businesses and only spend cash in them. That’s the best thing you can do for your fellow Americans, the economy and the environment.

    • nick kelly
      May 28, 2018 at 10:12 pm

      If you would like to study an earlier example of the parasite killing the host via junk bonds check out the Taj Casino in Atlantic City.

  2. Javert Chip
    May 25, 2018 at 8:30 pm

    Technically, I suppose once you buy something (PetSmart) you can do anything you want with it.

    Except the PE firm really didn’t pay for it (that was fobbed off on not-so-innocent third parties (greedy bond investors) and you’re going to put a major chunk of 55,000 employees out of work.

    As a capitalist, this is a tough problem: all three – unsuccessful retail managemen, PE firm and the bondholders – share some blame. It’s difficult to come up with a “rule” that smell “fair”, but current practice is heavily weighted toward “death sentence” as opposed to “life-line”.

    You can scream about bloodthirsty pirates killing off companies, but you still need a rule. My proposal isn’t a silver bullet, but (as a retired CFO) I’ve long advocated for a rule disallowing dividends/buy-backs that exceed some measure of free cash-flow (that at least stops/delays the “special dividend”.

    Of course, companies we’re discussing generally find themselves (bad management, changing consumer habits, all the above) find themselves circling the drain.(even without the LBO).

    • RepubAnon
      May 25, 2018 at 9:21 pm

      Perhaps a 15-year clawback provision for LBO-funded purchasers if the acquired company files bankruptcy? This would at least make it harder for the buyer to drain the acquired company of assets, and then walk away – leaving the suppliers, the employees, and any bond owners / shareholders high and dry.

    • Caliban
      May 26, 2018 at 9:09 am

      PE (Public Enemy) MBAs (Making Bankrupt Americans) MAUL (Making Americans Unemployed Losers) their targets with LBO (Legalized Bust Outs).

      • May 28, 2018 at 10:57 am

        I always thought “MBA” stood for “More Bad Advice”.

        • nick kelly
          May 28, 2018 at 10:33 pm

          The two most successful export economies in the world are Germany and Japan. The latter has no MBA’s and Germany barely has them. The oldest German MBA is 1995 (Heidelberg ) and is purely aimed at international students.

          In both economies the idea of studying business in general as prep to enter an existing biz is considered odd.

          In Japan it verges on untranslatable.

        • Leser
          May 29, 2018 at 6:30 am

          The reason that MBAs are less common in Germany is rather that historically, business studies would lead to the “Diplom” degree and took 5 years more, equivalent to doing bachelor and master studies in one go. Leaving uni before achieving the Diplom degree was rare and considered a drop-out/failure. Thus business graduates in Germany would be older and with more academic training, making an additional investment into an MBA less useful.

          Since the “Bologna” process has mostly replaced Diplom studies with bachelor and master studies, that picture has been changing. Still, looking back at a history of free uni education, students in Germany are more likely though to choose MSc over expensive MBA degrees.

    • Paul Goldsmith
      May 26, 2018 at 9:32 am

      Avert: I agree with everything you have said…but the circling the drain is an end result of LBO’s and their intentional crippling of the entity versus investing into the successful growth of the company.
      Although most PE firms will argue that they have nothing but good intentions the data will usually support the gutting and dismantling of the salable assets and discarding the carcass into the water for the seagulls…similar to gutting a fish…

      • Michael Fiorillo
        May 26, 2018 at 10:05 am

        It doesn’t matter what the PE firms argue: their behavior is what matters.

        Something has got to be done about these hybrid predators/ parasites: a high tax against special dividends or fees after an LBO, or a law that keeps the debt used to acquire the firm on the books of the PE holding company that does the acquisition…

        Or something… Because these people are totally out of control and need to be stopped.

        • d
          May 26, 2018 at 10:12 am

          To achieve change, you need to change, at lest, the Senate.

          To do that, you need to change the constitution, which needs the approval of the house and senate, who are both owned by the same group.

          So you have a problem.

        • alex in san jose AKA digital Detroit
          May 26, 2018 at 6:34 pm

          We just need to get out and vote.

          I need to look up the DSA recommendations for my area.

        • quack
          May 27, 2018 at 12:49 am

          Alex, are you interested in a bridge in Brooklyn?

        • Setarcos
          May 27, 2018 at 9:02 am

          Politicians are morally superior to PE firms? Don’t count on it unless you know them personally and even then that assessment is very risky.

          Trial lawyers can be vultures as well and those pols who scream the loudest about PE, dine with them frequently.

          Let’s examine root causes of problems so we can treat something other than symptoms.

        • Bobber
          May 29, 2018 at 9:18 am

          Why the knee jerk reaction to regulate? Let the bondholders suffer. Maybe they’ll learn.

          Let employees suffer. Maybe they’ll learn that working for a PE owned outfit is a bad bet, then these PE won’t be able to hire anyone, or they’ll have to pay twice as much.

      • Javert Chip
        May 26, 2018 at 7:25 pm

        I agree that LBOs generally accelerates the “gutting of the fish”.

        However, one of my points was that most of such firms would go bankrupt EVEN WITHOUT THE LBO. This is due (in PetSmart’s case) to years of strategically inept decisions by executive management. Where was the board of directors during these years of corporate drift?

        In other words, LBO accelerates, but does not necessarily cause the bankruptcy (it was going to happen anyway). PetSmart set itself up for that with years of bad management and declining performance.

        I will concede that the sheer brutality of LBOs probably errs on the side of destroying a (very) few companies that might otherwise have figured out how to save themselves.

        • Coaster Noster
          May 27, 2018 at 11:29 am

          Disagree. I think LBOs are simply one more method of using money to make money in a “Rules-Based” economy; it’s not “Capitalism” in any sense of the word. How would the distributed “special dividend” make any sense whatsoever, in true “free enterprise”?
          Options trading (look at Micron Technology, every Friday) for no advantage to the company, GM buys a self-driving car LIDAR maker for ONE BILLION dollars, when it was started for $18 million, and last evaluated for $90 million, and consists solely of “brainpower” of forty guys. This is not free enterprise, this is money manipulation, not “capitalism”, not “freedom”. This is all like “trust busting” of 110 years ago, turned on its head!

    • Gibbon1
      May 26, 2018 at 11:34 pm

      The LBO retail scam reminds me of the old mafia furniture store scam.

      The operators find a patsy. Load him up with some cash. Then they open a store front. Use the patsy’s credit to fill the store with inventory on manufacturers credit. Then they sell everything at a discount or move it to stores they control. Take all the money and bail, leaving the patsy to serve some time in jail for fraud. The profit all comes from screwing the manufacturers who extended credit.

      Only difference with an LBO is is no one goes to jail.

    • kiwi
      May 27, 2018 at 8:41 am

      How about we force the members of the lbo to be responsible for the debt instead of the companies.

      That might stop this mafia in its tracks and leave some companies to survive.

    • beard681
      May 28, 2018 at 8:21 am

      Just tax share buy backs as ordinary dividends (paid by shareholders of record) and treat funds raised for LBOs as startup capital and not tax deductable interest wise. Problem solved.

      People who know don’t care, people who care don’t know. I have been short for a while, looks like my payday is coming.

  3. bev kennedy
    May 25, 2018 at 8:32 pm

    This is a case where greed is strangling commercial enterprises

    • Javert Chip
      May 25, 2018 at 11:12 pm

      Bev Kennedy

      Most companies finding themselves in LBO-land will end up either bankrupt, or bought for pennies on the dollar and integrated into a larger, stronger parent (PetSmart probably not an “integration” candidate).

      Substantive & sustained management failures expose companies to end-of-corporate life; AKA bankruptcy. PE firms (and LBOs) accelerate this process, and they certainly abuse the economics of the situation. However, for most, the end result is the same, only the timing varies.

      • orangecats
        May 27, 2018 at 1:08 pm

        I chuckle at your admission that P.E. firms never help a company turn around, but merely “accelerate the process.”

        Leveraging a company to the max is how P.E. firms get their pound of flesh. Whether the company could have been revitalized by other, smarter means YOU cannot say.

        • Javert Chip
          May 27, 2018 at 4:37 pm

          orangecats

          I have never said “P.E. firms never help a company turn around” – you said that, so go chuckle with yourself.

          As a retired CFO (and not in the turn-around business), I’ve had years of experience watching companies attempt turn-arounds. Generally speaking, the weaker a company, the more likely it is for an LBO attack; the stronger a company, the more favorable it’s options (eg: selling bonds, bank loans, selling more stock).

    • MC01
      May 26, 2018 at 6:14 am

      In my experience there are three chief reasons why a PE firm or a large group may want to get into a buyout.

      The first is to get rid of a competitor or, more often, what management believes to be a competitor. Albeit not exactly common, it happens: see Husqvarna taking over fellow Swedish firm Partner AB.

      The second is to get full, unrestricted access to some technology you really really want or to enter a market with an already established sales/assistance network and readily recognizable name. See again Husqvarna buying Zenoah from their owners (Komatsu) to get full access to Stratocharged emission control.

      The third is the kind of PE predation chronicled here. Mind however that PE firms tend to behave just like wolves or lions: they go for easier picking than the fastest running deer or strongest Cape buffalo.
      As Chip says below, most if not all victims of purely speculative LBO’s have some issues which may not be immediate to an untrained eye but are there under the surface. Perhaps shareholders and management do not see eye to eye. Perhaps decent financials hide serious issues in adapting to changes to the business environment. Or perhaps the family owners are just tired and want out.

      Then there is what I can only call momentary corporate insanity, such as BMW’s absolutely incomprehensible takeover of the motorcycle division of Husqvarna which people will still be trying to explain in twenty thousand years.

      • Sneaky Pete
        May 26, 2018 at 6:45 am

        A pretty sad situation all around. But look on the bright side. Things could be worse. The Fed could be investing.

        • MC01
          May 27, 2018 at 2:19 am

          Plenty of people here in Europe with short memories and little will to do the math cheerleading for nationalizing this or that company. See France and Italy where governments are back in the “investment” business with tragicomical results.

          Have you ever wondered why Boeing is such an enthusiastic buyer of aircraft parts from Alenia of Italy? Because Alenia, a company whose largest shareholder is the Italian government, sells them parts at cost or even at a loss to keep the factories down south open. No truly commercial firm could last long even in our next to zero interest behaving like that: at least Tesla and Uber promise people they’d be highly profitable at some unspecified point in the future. Alenia must either remain a financial black hole or face ferocious competition from US, French, Korean and Japanese manufacturers.
          It’s the classic lose-lose scenario… for taxpayers and savers footing the bill.

    • beard681
      May 28, 2018 at 8:22 am

      People are all and always greedy. This is a systemic problem with financial market rules as currently written.

  4. May 25, 2018 at 8:51 pm

    In the hilarious Google-advertising irony, now that I’m looking at this page, it’s full of ads by Chewy.com

    • Alistair McLauglin
      May 25, 2018 at 9:32 pm

      All I’m getting is an ad for La Senza panties for $8.50. Admittedly not a bad deal, but I’m partial to boxer-briefs.

      I assume Google Adsense looks at my cookies and choses ads based on my browsing history? I’m on my wife’s iPad right now.

      • alex in san jose AKA digital Detroit
        May 26, 2018 at 4:06 am

        Mostly my ads are all about selling my own Ebay items back to me.

      • nick kelly
        May 26, 2018 at 10:26 pm

        Beware scams. The ones I got were brand new.

        • Night-Train
          May 28, 2018 at 12:12 am

          NK:
          That was a chuckle, but I’m not sure many folks got it.

      • nick kelly
        May 26, 2018 at 10:26 pm

        Beware scams. The ones I got were brand new.

    • JB
      May 25, 2018 at 9:47 pm

      wow , i have the advertisement on my page also . the algos are scanning your content.

    • d
      May 26, 2018 at 4:50 am

      Different entity, same old LBO fraud story, and same victim group.

      But, in the US this is legal, Still.

    • fajensen
      May 26, 2018 at 1:48 pm

      I can date some Greek ladies! I hired a few so yes I can – if I want wife to take Half :).

      • Frederick
        May 26, 2018 at 2:00 pm

        Be happy if she takes only half

    • cdr
      May 26, 2018 at 3:01 pm

      I just linked to Chewy.com. Weird. I remember dogs that used to freak out if you gave them a piece of what you were eating or a squeak toy or if you tied a knot in a sock that was personally tossed for the purpose of a good chase.

      I have nothing against PetSmart. I wish them well and in a perfect world they would prosper.

      But, looking at the big picture, this is the result of both societal / technological trends and ZIRP that killed household income on Main Street and PetSmart is another casualty. Free money kills the economy over the long run, although a few favored people do quite well from it.

      • Javert Chip
        May 26, 2018 at 7:37 pm

        What killed PetSmart has nothing to do with the world not being perfect.

        It has to do with changing consumer preferences and PetSmart executive management’s failure to adapt.

        PE firms simply smell dead-meat-walking, and accelerate the process in what I believe is a currently-legal but unethical manner. A lot of this bad behavior would come to a screaming halt if the PE firms could not get their “special dividend” before dumping the whole cow-pie on greedy bond buyers.

  5. raxadian
    May 25, 2018 at 9:59 pm

    LBOs are something that really should be made a crime.

    But then, why would they?

    Nothing to see here, is business as usual.

    • Paul Easton
      May 25, 2018 at 10:20 pm

      A crime? It is a mitzfa. The First Law of the Economy is that money always flows uphill. If it didn’t that would indicate a System Error.

      • Javert Chip
        May 25, 2018 at 10:44 pm

        Paul Easton

        Taking a trip to almost anywhere in Greece (even Athens) and comparing to America might cause you to think otherwise.

        For reference: income level for the global “top 1%” is about $33,000…

        • Kent
          May 26, 2018 at 12:30 am

          Well, we’re Americans. We compare ourselves to great industrial nations, not Greece.

        • Paul Easton
          May 26, 2018 at 10:54 am

          [Jesus] replied, “Because the knowledge of the secrets of the kingdom of heaven has been given to you, but not to them. Whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them.

          The knowledge of the secrets of the kingdom of heaven has been given to Americans, but not to useless Greeks.

        • Javert Chip
          May 26, 2018 at 10:35 pm

          Kent

          So I point out the error in the statement “…the First Law of the Economy is that money always flows uphill. If it didn’t that would indicate a System Error….”. American workers have plainly shared in flow-down of capitalist wealth.

          Greece (which is a perfect example “always flows uphill”), and you say it’s a bad example.

          What other large country (large = more than 15 million population) has a higher average (or median) wage than the USA? WARNING: people who live in their mom’s basement may have difficulty with the answer to this question.

          HINTS: I know Luxembourg does, but it only has a population 500 thousand…Switzerland, Sweden, Norway, Finland don’t exceed the US household median, and are all in the 5-10M population range (FYI: all 5 added together about equal LA’s population); none of them come close to being as racially diverse as the USA.

        • Dave P
          May 28, 2018 at 4:13 am

          Javert,

          I would like to add to your assessment of median income.
          The USA has the highest level of income inequality in developed countries, by a large margin. Our society is becoming bifurcated into the very very wealthy and the poor as our middle class shrinks, That middle class was once the envy of the world, but that is when we had strong unions and less crony capitalism then today. There is a funny analogy about Bill Gates walking into a dive bar in a poor neighborhood. If you then calculate the median income of the bar patrons they are all millionaires.

          The main thrust I am attempting to make is those “median” numbers are QUITE skewed to paint a far better picture then the reality on the ground.

      • alex in san jose AKA digital Detroit
        May 26, 2018 at 6:36 pm

        You are to be congratulated for the most creative mis-spelling of “mitzvah” I’ve ever seen.

  6. MCH
    May 25, 2018 at 10:13 pm

    Oh no, where will my bunny get her food. At least you’re still Petfood express, and a bunch of other stores that can still be taking over via LBO. Is there any chance that they can do I’ll be all of the local mom-and-pop stores?

    Oh I forgot, there’s always Amazon.

  7. van_down_by_river
    May 25, 2018 at 10:20 pm

    Bond buyers, who gave their money to these LBO jerks, get what they deserve, or so I hope. If only the LBO jerks would get what they deserve… but of course that could never happen. Finance now swallows up almost 20% of GDP yet provides almost nothing of value in exchange for the money they skim.

    Finance and the Medical Industrial Complex take about 40% of our income as a nation, it would be fun to watch them start to battle each other as they fight over larger and larger pieces of the pie.

    • Javert Chip
      May 25, 2018 at 10:47 pm

      Wow. Throw in about 40% taxes…AND THAT’S 100% OF NATIONAL INCOME.

      Or, maybe we got a couple broken numbers here somewhere.

      • juanfo
        May 28, 2018 at 5:01 pm

        Subsidies overlap?

    • Silly Me
      May 26, 2018 at 2:48 am

      The question is where the bond buyers got their money from. :)

      • lenert
        May 26, 2018 at 12:40 pm

        Wonder how much from pension funds since given the “safety” of bonds.

    • Gibbon1
      May 26, 2018 at 11:49 pm

      [Bond buyers, who gave their money to these LBO jerks, get what they deserve, or so I hope. ]

      The initial bondholders do okay because the bond pays out… until it doesn’t. Which can be years down the road. By which time the original bond holders have long since passed the paper to some sucker.

  8. timbers
    May 25, 2018 at 10:40 pm

    You can still get pet hearth worm medicine from Australia w/o a prescription at much lower cost that in the U.S. (i.e. w/o paying grift and monopoly prices because of Obamanation’s ultra rich friends and the rich gigantic corporations who donated to Obamanation, Hillary, and Trump).

    • Lee
      May 26, 2018 at 7:55 pm

      How much do people pay in the USA for that stuff?

      How about a normal trip to the Vet for a check up?

    • Chief Murphy
      May 27, 2018 at 7:14 am

      I get my dog’s heartworm meds online in the US legally. About $20 for 2 years worth. No veterinarian needed. Not sure what you’re going on about.

  9. Trinacria
    May 25, 2018 at 10:57 pm

    I’m really surprised that those who provide this type of financing don’t have debt covenants that try to restrict or even prohibit “special dividends”…are these folks that stupid? Don’t they realize the strong possibility of being “bag holders” ?

    • Javert Chip
      May 25, 2018 at 11:20 pm

      Yes they are that stupid: up front, they only want the higher yield. If things go bad, just hunt for the greater fool and offload the stuff to him/her. Turns out, greater fools that stupid are relatively rare (well, you know, other than pension portfolios).

      Argentina (which has only been out of default for about 15 minutes of the last 200 years) just sold this crowd 100 year Argentins bonds denominated in US dollars (not pesos)

      • Silly Me
        May 26, 2018 at 2:51 am

        Nope, they are spending some poor morons’ money and even charge them for the “investment.”

        • Silly Me
          May 26, 2018 at 2:56 am

          I suspect it’s public pension funds in which the investing officers receive a kickback one way or another.

    • R2D2
      May 25, 2018 at 11:27 pm

      I have a feeling that those who do the actual lending are not the owners of the money they lend; it’s probably small investors’ money. I wouldn’t be surprised if the manager or whoever who makes the decision to lend money for such obviously fraudulent operation gets a huge kick back himself/herself.

      • Gibbon1
        May 26, 2018 at 11:51 pm

        I think part of the scam is the managers that sell out their investors or pension fund, etc do so with the understanding that the PE firm will cut them in personally on the next deal.

      • juanfo
        May 28, 2018 at 5:05 pm

        Financial institution managers get paid commissions for the loans. Obvious conflict of interest but who’s watching?

        • d
          May 29, 2018 at 3:03 am

  10. Blockhead
    May 25, 2018 at 10:57 pm

    From the PE firm’s point of view, it does not matter how much is bid to acquire the target company. Nor does it matter whether they know anything about the business they acquire. Post acquisition, all debts areloaded on to the aquired company and the acquirer in this case walks away with $800 million in special dividends payable to itself. Sounds to me like murder in broad daylight, with the murderer amply rewarded. Shouldn’t there be a law against this?

    • MD
      May 26, 2018 at 1:27 pm

      Well the fact that it ISN’T illegal shows loud and clear that countries such as the USA (and sadly it’s far from alone) have economies not run for the needs of the greater populace, but for the whims and desires of already-wealthy financial speculators.

      It’s been this way since the go-go ’80s and now the effects are really being felt (smashing of labor unions and removal abroad of well-remunerated manufacturing jobs is of course one of the main symptoms; saturation of society with debt is another).

      Once short-term ‘grab everything for yourself and get rich quick’ thinking rules the roost, and no-one pays any attention to wealth disparity, it’s generally the end for prosperous, civil society.

      • bev
        May 26, 2018 at 1:47 pm

        I concur. In Canada as in many other western democracies even access to judicial remedy from predatory financial practice for the average citizen has been outsourced to commercial entities, who in footing the bill are not answerable to taxpayers or voters

      • Bob in Scottsdale
        May 27, 2018 at 4:09 pm

        I completely agree. The economy should be strictly run “for the needs of the greater populace.” Working people of the world should unite and force political change requiring that capital be owned by the workers and deployed to benefit the most people. Maybe I’ll write a book…

  11. Javert Chip
    May 25, 2018 at 11:24 pm

    Pretty darn good description of the PE process.

    Now, how would you define the “crime” so when it happens, you have something to prosecute?

    • May 25, 2018 at 11:35 pm

      If lenders and investors didn’t play along with LBOs, they wouldn’t happen. During boom times, investors want LBOs to happen. They clamor for them. Wall Street loves them (huge fees). Remember “Merger Monday?” Investors in them need to get crushed, and then LBOs disappear for a while because there’s no one left to fund them.

  12. TruthHurts
    May 25, 2018 at 11:33 pm

    How come PetSmart’s page on Yahoo finance looks as if the company is not active anymore? https://finance.yahoo.com/quote/PETM?p=PETM.

    Is PETM still their ticker?

    • May 25, 2018 at 11:40 pm

      “…looks as if the company is not active anymore?”

      Correct. An LBO means that the PE firm acquired most or all of the shares of the company in the buyout (3/2015). The company is now privately owned. And the shares are no longer publicly traded. The the company is delisted. The earnings reports stop, etc.

  13. Rates
    May 26, 2018 at 4:15 am

    Pets.com, and now PetSmart. We can’t have a genuine crash when pets aren’t involved.

    They can still things around by using the patented highly advanced BlockPet technology :)

  14. Frederick
    May 26, 2018 at 4:43 am

    I hear a lot of west coast homeless have pets so they should be OK with all that panhandled money out there In the Hamptons where I lived for 20 years the Wall Street people just abandoned their pets after Labor Day so as not to be a financial burden I guess

  15. Halsey Taylor
    May 26, 2018 at 8:36 am

    I really dislike Petco. But, after the LBO, Petsmart drove me to them.

    For example. the PM website is a bloated and dysfunctional chore to use. On the last trip into the local PM for 3 stocked items, they had only 1.

    They just don’t seem to want my money.

  16. Ambrose Bierce
    May 26, 2018 at 9:45 am

    I’ve got it, let’s ask the Fed to raise rates until these junk bonds are on a par with Treasuries, implying there is almost no risk?

  17. nick kelly
    May 26, 2018 at 10:56 am

    I guess these bubbles didn’t deflate slowly. Will others?

  18. hendrik1730
    May 26, 2018 at 11:31 am

    It’s quite simple. Leveraged buy-outs or loan-financed share buy-backs should be illegal. This kind of shit – destroying value – is only possible because the “gubbernment” allows it.

    • Bob in Scottsdale
      May 27, 2018 at 4:18 pm

      Why should it be illegal? There was a willing seller, a willing buyer, and an agreed upon price. There was a bank willing to provide financing. There were vendors willing to extend credit before and after the deal. There were employees willing to work there before and after the deal. Do you propose that we make illegal a deal which all involved

      • d
        May 27, 2018 at 10:54 pm

        The Company would obviously default on the bonds that financed the LBO, as soon as reality was injected into its financial projections. After the Special Dividend/s and other associated LBO “Fees”, were paid.

        In Most normal countries, this is classed as Predatory Lending Fraud.

        The first buyers of the Bonds, who brought them with OPM (Other peoples money) with the intention of selling them quickly, for a small % profit (Mostly in fees to themselves), knew this. Hence they are are party to the fraud, in most Normal Countries outside America.

        Hence two parties/groups to the deal, are Fraudsters.

        The Fact, that it is legal, does not stop it being Criminal. Or Fraud.

        America, and more so everyday china, are the lands of Legalised Corporate Fraud.

        Many of the “investors” in Segments of china recently opened to Foreigners or Greater Foreign “Investment” will discover this as time passes.

      • Dan Romig
        May 28, 2018 at 7:26 am

        Yes, that is the price that’s paid by a publicly traded company: another entity can purchase the shares and take it over.

        My dad worked at Northrup-King Seed; which began in 1884. In 1968, it offered its first public stock shares, and in 1976 it was bought by Sandoz, Ltd. of Switzerland. In 1997, Northrup King became a subsidiary of Syngenta.

        There’s two other large agribusiness corporations in the Twin Cities, but they won’t be taken over in a buyout or LBO anytime soon as neither are publicly traded. Cargill was founded in 1865 and had over $100 billion in revenue last year! And Land O’Lakes which is a farmer owned co-op was founded in 1921. L O’L had revenue last year of $14 billion, and a return on equity of 17%. Not too shabby, eh?

        While I sure as hell would like to own some stock in Land O’Lakes, I do own a bit in another Twin Cities agribusiness co-op which is publicly traded. Cenex Harvest States is a relative newcomer as it was founded in 1931. They pay an 8% annual dividend (paid quarterly) on a $25 share price. CHSCP closed Friday @ $29.97.

      • JessyS.
        Jun 6, 2018 at 12:07 pm

        In short, all leveraged buyouts are modern day piracy. Almost all assets are stripped by the LBO firm and the target saddled with massive debt. In the days of pirates on the high seas, that is like a ship of pirates sailing toward a target, finding the target, and plundering that target. In this case, you are plundering a firm’s assets and there is no way the federal government can’t say no to robbery charges. The only reason why they haven’t been filed against the likes of Bain and others is because the Presidents and Justice departments have been looking the other way.

  19. DixieGirl
    May 26, 2018 at 12:38 pm

    Pet Smart does a lot for the Communities. The local Animal Rescues show every weekend at the local PetsSmarts.the Lical Animal Rescues are able to foster cats at Pets Smarts. When you purchase a product at PetsSmart you can give s donation to the Shelter Pet Charity. This is one store I will occasionally shop at because of all their good work with the communities.

  20. Tom Kauser
    May 26, 2018 at 1:45 pm

    Bridge loan until Wilber gets back from Beijing? Summer of magic kingdom fun? When it was going good it was USA and now Canada gets mentioned? Durable goods orders include battleship manufacturing with its washing machines orders (stuff that last for five years takes ten years to pay off)? We make battleships and lend/lease to China?

    • bkennedy
      May 26, 2018 at 2:17 pm

      In the Victorian era cheap imports of straw boater hats gutted the British home industry of artisanally hand plaited hats.
      This is not new.

  21. Tom Kauser
    May 26, 2018 at 1:49 pm

    United Special investment vehicle of America US(i.v.)A

  22. Fernando
    May 26, 2018 at 7:56 pm

    Parasite Capitalism and making money through fraud and deceive…..disgusting

    • Javert Chip
      May 27, 2018 at 4:49 pm

      Well, socialism is much more efficient because it steals directly from all the people (inflation, rationing, embezzlement by national “leaders”, etc). Cuts out the middleman.

      • Night-Train
        May 28, 2018 at 12:37 am

        I think the differences between capitalism and socialism are closing rapidly. There are a lot of things going on today that you could write an article about, leaving out the location of the occurrence, and we would be hard pressed to determine that location without other clues.

  23. Daryl Greco
    May 27, 2018 at 7:14 am

    This is a crime. Why should a few greedy people be allowed to destroy a business and disappear 10’s of thousands of jobs.

    • Javert Chip
      May 27, 2018 at 8:01 pm

      Daryl Greco

      This IS NOT a crime; in fact, it is perfectly legal. I think we both agree that it’s highly unethical.

      So a regulatory rule is required to modify behavior.

      Current practice: PE firms load LBO debt onto a target company by selling bonds (these ARE NOT bank loans – no bank will touch them). PE firms then extract a “special dividend” “or “management fee” and walk away, having made money. When the bonds go bust, the greedy bond-holders take the haircut.

      Proposed practice: Regulate “related party” transactions such that any payments from the target company to the PE firm must be less than some reasonable measure of the target firm’s free (not EBITDA) cash flow. This requires the PE firm to get the target firm healthy enough to pay the fees.

      If enacted, this would exclude a certain class of companies from LBOs by PE firms (generally, very weak companies that will soon end up in bankruptcy).

      • d
        May 27, 2018 at 11:05 pm

        Just Outlaw LBO’S.

        Much simpler much less regulation.

        Much less money for regulators and law makers.

        Upside.

        A class of “corporate predator”.

        That serves only itself, in the current system.

        Extracting much needed Working Capital of others, from the System, in the process. So long term Weakening the System.

        Would be piratically eliminated.

        This would benefit everybody.

        Except the Predators in question.

        Not very American. There again most, Ethical, Sensible, Financial Regulation’s, that protect the “many”, aren’t are they.

  24. raxadian
    May 27, 2018 at 10:11 am

    If Swiss banks are no longer safe havens, why do LBOs still exist? Answer: Because of money dear boy, LBOs still pay taxes, while tax havens avoid them.

  25. Alex
    May 27, 2018 at 12:06 pm

    I wondered how Chewy would make shipping heavy dog food to distant customers when Pets.com couldn’t make it work. Do they have UPS handle warehousing and logistics?

    • raxadian
      May 27, 2018 at 1:31 pm

      They probably subcontract the deliveries to the cheapest offering.

  26. DK
    May 28, 2018 at 8:43 am

    “Our word is bond”. ~ Dumb And Dumber.

  27. puzzled
    May 28, 2018 at 9:36 am

    I don’t understand how this can be true. We know from economists that no one would loan these private investors money without an appropriately high interest rate to compensate for the high probability of default. Therefore, we can conclude that they cannot earn above a zero rate of economic profit. QED ;

  28. Gene
    May 29, 2018 at 9:45 am

    I never bought dog food from either Petsmart or Chewy.com. I buy premium dog food from Jet.com, which is owned by Walmart. The shipping, when the order is $35 or more, is free; i.e., embedded in the price. I get 30 lb. bags delivered right to my door by UPS within a few days of ordering. I think the difference in price between Jet and a neighborhood pet store that carries the same brand is about $10-$12, with Jet being cheaper. I buy glucosamine tablets from Petsmart.

Comments are closed.