Pets at Home sold for £955m

Senior management and investors to pocket bumper payout after sale to KKR

Pets at Home has been sold to the US private equity firm Kohlberg Kravis Roberts (KKR) for nearly £1bn in a deal that hands its top directors, co-investors and its founder a bumper pay day.

Bridgepoint Capital, the current owner of the pet food and accessories specialist, which has more than 250 stores, had been running a controversial dual process of considering either a float or sale, but decided to abandon flotation plans after four competitive second-round bids came in on Monday evening.

John Pfeffer, the European retail head at KKR, said: "We are enthusiastic about the significant further potential for Pets at Home to grow, develop and continue to deliver its unmatched breadth of products, store environment, competitive pricing and customer service."

The lofty sale price will be seen as a fillip for the fast fashion giant New Look, which is also considering whether to go for a float or a sale. Ocado, the online grocer, is also planning an initial public offering this year.

KKR has bought Pets at Home in a deal worth £955m, including the assumption of £233m in debt. Market sources said the private equity firm had paid "top dollar", as the deal values the retailer at 2.4 times annual sales.

Pets at Home, which generates the bulk of its sales from pet accessories, was attractive to private equity firms not only because of its growth potential, but also its lack of competitors. While it sells some live animals – including rabbits, hamsters and exotic fish – these make up less than 5 per cent of sales. It does not sell cats, dogs or birds. On pet food sales, the retailer battles against the supermarkets.

Bridgepoint bought the retailer in 2004 in a deal that valued Pets at Home and its debt at £230m and gave the private equity group a majority stake of more than 60 per cent. Bridgepoint, which planned to open up to 400 stores in the UK, has delivered a return of more than eight times its original investment.

The chain has been refinanced four times, with investors pocketing more than £120m. Since 2004, the retailer has more than doubled its annual underlying earnings, to more than £70m in its last financial year to 26 March 2009.

Matt Davies, the chief executive of Pets at Home, said: "KKR's investment represents a resounding endorsement of our success to date." For the six weeks to 7 January 2010, Pets at Home stores that had been open for more than a year posted a 6.7 per cent rise in festive like-for-like sales, boosted by customers buying dog coats in the cold weather. One of its best-selling products at the moment is the "Boutique Furrari Dog Bed", which retails for £34.99.

Pets at Home's senior managers, including Mr Davies, collectively hold less than 15 per cent of the equity in the company, putting them in line for lucrative payouts from deal.

Anthony Preston, who founded Pets at Home with a single store in Chester in 1991, had a 12 per cent stake, but he is retaining some of his investment under KKR. Bridgepoint also plans to share a £3m bonus payment between the retailer's 4,200 staff.

KKR's other retail investments include Toys R Us and the high street chemist chain Alliance Boots.

City fury at strategy: 'Twin track' sale or float process under fire

The sale of Pets at Home to KKR has fuelled City anger over private equity-backed companies holding trade sale auctions while marketing themselves as potential stock market flotations.

The fashion giant New Look, which is backed by Permira, is also running a twin track, which will potentially let it extract as high a price as possible from a sale but gives it the option of a float if bids fail to match its asking price.

A market source said: "You are simply playing private equity off against the City – it is incredible." He added that institutions cannot compete against the type of deals private equity firms put together. Some fund managers are threatening to shun private equity-backed businesses that run twin-track processes. Andy Brough, a fund manager at Schroders, recently said: "Why on Earth would an institutional investor want to outbid a venture capital firm?"