Petco Holdings Inc will potentially be acquired by PetSmart Inc. The two companies have had informal discussion regarding PetSmart’s potential acquisition of Petco. However, neither company is publicly disclosing any information regarding a potential acquisition.
While Petco operates more stores in the United States their revenue does not compare to PetSmart. Petco has 1,400 stores in the US and had a revenue of $3.99 billion USD last year while PetSmart has 1,300 stores in the US and had a revenue of $6.9 billion USD.
If PetSmart acquires Petco then the resulting company would control approximately 30% of the American specialty pet retail market. Such dominance would probably result in store closure according Howard Davidowitz, CEO of Davidowitz & Co., a retail investment bank and consulting firm. Davidowitz said, "They would never even get to this point without having met with every smart merger lawyer and looked at this 1,000 different ways. When you go forward with this, you are spending tens of millions of dollars just to explore it."
Wedbush Securities Analyst, Seth Basham believes that a merger would increase market concentration which would be a warning sign for regulators. Regulators may require store closures. Even if they do not, PetSmart may close Petco locations. Basham said that approximately 72% of Petco locations are within five miles of a PetSmart.
Regarding a merger, Davidowitz said, "If you are asking me if things are going to be better after the merger, (the answer is) absolutely not. What they should be doing is perfecting their businesses, coming up with specialty niches within pets. I can think of a hundred things they ought to be doing."
Basham believes a merger is “feasible and very attract financially”. He said, "We believe a combination with Petco would buy PetSmart synergies, but would not solve its competitive dilemma, underscored by rapidly shifting shopping behavior and increasing online competition. In fact, an acquisition of Petco could distract PetSmart from addressing this issue and add increasing pressure. After all, Petco is a smaller and somewhat weaker competitor with generally higher in-store pricing."
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