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Woolworths Delves into the Pet Retail Sector

Connor Maher

Connor is a Junior Equity Analyst with ASR Wealth Advisers. He holds a Bachelor of Science from Newcastle University (UK), with honours in Economics and Finance.

Woolworths

Australia’s largest grocery retailer Woolworths (ASX: WOW), has agreed to acquire a 55% stake in specialist pet food, accessories, and service retailer Petspiration for a cash offer of $586 million. The transaction is subject to the relevant approvals from ACCC (Australian Competition and Consumer Commission) and NZCC (New Zealand Commerce Commission). The Petspiration Group has a variety of brands under its umbrella, including PETstock AU, Caribu, and Glow, amongst many others, which provide a wide array of animal services across Australia and New Zealand. Petspiration is Australia’s second largest pet retailer (behind Pet barn), with a physical footprint of 276 stores, thriving e-commerce platforms, and a 2.4-million-member strong loyalty program.


Based on the Petspiration group’s net debt of $670 million, the transaction implies an enterprise value of circa $1.7 billion. The acquisition will primarily be funded by WOW’s recent sale of a 5.5% stake in the Endeavour Group (ASX: EDV) which netted the business $636 million. Woolworths Group CEO Brad Banducci commented on the acquisition, "Specialty pet is a large and growing retail segment in which we have a limited presence. We are delighted to be investing alongside founders Shane and David Young in Petspiration, the number two player in the segment.”


The existing shareholders of Petspiration will maintain a 45% stake within the business, alongside the current CEO and Managing Director maintaining their positions in running the company under the umbrella of the Woolworths Group. As per the terms of the transaction, Petspiration will be placed under a separate board and governance structure. 


The acquisition will give Woolworths exposure to the specialty pet sector (currently a $10 billion sector), which, given the high amount of pet ownership throughout Australia and New Zealand, is a logical step to take. According to the AFR, Dog ownership rose 25% between 2019 and 2022, and cat ownership soared by a meteoric 43% in the wake of the Covid-19 pandemic. Currently, almost 70% of Australian households own a pet, with the average lifespan of pets nearly doubling over the past ten years due to increased spending on animal nutrition and healthcare. 


Being a relatively mature and low-growth business, this acquisition will provide WOW with a significant opportunity to grow its earnings by covering its customer’s pet demands and thereby diversifying its earnings mix away from the grocery sector. We view this acquisition as a logical foray into the growing sector as WOW will directly benefit from Petspiration’s expertise, which would have been lacking had the retailer expanded into the sector organically. Additionally, the headcount on Petspiration’s loyalty program is likely to be incorporated under WOW’s “Everyday Rewards” program. This additional customer data will give WOW a big boost, ultimately delivering further insights into its customers and their spending habits. These insights have the capacity to deliver more targeted promotional campaigns that will drive customer retention and spending across the group. 


Simultaneously, Petspiration will also benefit from Woolworths's large customer base and loyalty program. This will likely drive an increase in earnings as WOW begins to focus a portion of its promotional activities on Petspiration’s side of the business. In light of Petspiration’s e-commerce footprint, the pet retailer will now be able to leverage WOW’s existing systems and expertise to drive growth in its own e-commerce platforms. This will likely be supported by the customer insights yielded by WOW’s customer loyalty program. Operationally, Petspiration is likely to materially benefit from WOW’s ownership through its ability to leverage their expertise in running such a large and operationally complex business. Cost synergies will therefore be driven by the increased economies of scale within the Woolworths group, which will consequently reduce Petspiration’s costs in many areas, i.e., production, supply chain, and logistics costs. Thus, from a synergies standpoint, it is abundantly clear that the overall transaction is mutually beneficial to both parties involved. 

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