Vol. 5 Issue 1 Q IN THIS ISSUE

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1 IN THIS ISSUE M&A activity for the Pet industry has remained steady from Q with another 7 transactions announced this quarter. Strategic acquisitions are still top dog when it comes to M&A activity. However, private equity is really ramping up their focus on the industry and are paying higher-then-standard PE multiples for branded pet companies. Overall the outlook in 2014 for the pet industry is positive! Growth is expected to continue across all pet categories at a rate of about 5 percent, with industry sales increasing to $64.92 billion in 2014, and a projected $75.09 billion by 2017, according to MarketResearch.com. Deal Activity P. 1 Spotlight P. 2 M&A: Value Drivers P. 3 M&A Market Overview P. 4 About SDR P. 6 Pet Deal Activity Highlights Q Pet M&A Activities Sniffing Out a Deal Phillips Pet Food & Supply. Acquisition Type: Strategic Top 5 Value Drivers: Increasing Pet Portfolio Successful Brands Robust Growth Opportunities Supply Chain Innovation Strong Distribution Relationships 1 Securities offered through Colorado Financial Service Corporation. Member: FINRA-SIPC.

2 2013 Vol. 5 Issue 1 Q1 2014

3 An article by SDR s Ben Rudman What Drives the Value of Your Business? (Part 2 of 3) The pet industry is an ever-changing landscape, but there are three general approaches used to value companies within the industry including an asset-based approach, present value of future cash flows approach, and market comparables approach. Asset-Based Approach The first valuation approach is the asset-based approach. This approach focuses on a company s net asset value which is the fairmarket value of its total assets minus its total liabilities. Although that may seem like quite a mouthful, the concept is actually relatively simple. Consider your own personal balance sheet. The difference between your assets and your debt is your equity, or net assets. There are several variations of the asset-based approach, but its essential goal is to reveal the underlying economic value of a company s assets net of liabilities. Income Approach Second is the income approach. The income approach considers the present value of future cash flows. A dollar today is worth more than a dollar tomorrow, just as a business today is worth more than a business tomorrow. By predicting cash flows for the next 5-10 years and discounting them back to the present, we are able to reach a present value amount of what the company should be worth today.the accuracy of this model is based upon the accuracy of predictions, so managers should carefully evaluate assumptions made in the pro-forma statements. Typically the market prefers to have guarantees on income projections, and the best way for a company to demonstrate this is to establish sales contracts with customers. Market Approach Finally, there is the market approach. In the words of SDR s Carol Frank, your company is worth what the market will pay. This approach focuses on what similar businesses are deemed to be worth by the market. Within the market there are many companies engaged in business, and therefore their transactions can be used as a guideline for determining valuation multiples. For example, when Nestle acquired Zuke s this was a huge market transaction that set the tone for future acquisitions within the pet industry. As more mid-tier pet companies get acquired, they will look to the Zuke s transaction as a benchmark. The Three Legs of the Stool In order to be valued highly, a company must posess all three legs of the stool. A one or two-legged stool is not as strong or as stable as a threelegged stool. The three legs of the stool include brand reputation, growth, and high margin. The more recognizable the brand, the higher the premium. Double digit revenue growth for at least the past three years and strong gross margins (total sales revenue minus cost of goods sold divided by total sales revenue) over 50% allow a company to be valued at a higher multiple. Zuke s possessed these three qualities and was sold to Nestle with a valuation multiple between 12x to 15x EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). By having the three legs of the stool, a company should reach higher valuation multiples through these three valuation approaches. Each approach will produce different values, and one will be more appropriate than the other depending on the situation. Transactions and companies vary, so it is important to consider all of the different factors involved including product line and reputation. 3 Securities offered through Colorado Financial Service Corporation. Member: FINRA-SIPC.

4 Pet Industry Growth Trend Going forward, growth in the pet industry is projected to be 5% annually through 2017 exceeding $75B, according to MarketResearch.com. Supplies for pets had the largest increase in 2013 with 4.8% growth, but the hottest segment to watch is specialty pet services, which according to forecasts from IBISWorld reports has been the fastest growing segment in the industry. After 20 years of consistent growth, pet-related consumer spending still has a very positive outlook. As disposable income rises, pet owners are expected to invest in premium niche products. With over 68 percent of households owning at least one pet, pet ownership is the key to growth, particularly as pets become seen as valued members of the family. Deal Multiples Increasing The 2014 Pepperdine Capital Markets Study interviewed 141 investment banks, indicating slight increases in deal multiples. Recent activity suggests that buyers are willing to pay approximately 3.0x 11.0x EBITDA across all industries which is a slight improvement from 2.5x 8.0x in Zuke s was recently acquired by Nestle for 12.0x 15.0x EBITDA. As financial buyers pay higher multiples, so will strategic buyers in order to compete for attractive companies. The environment is ideal for a company looking to sell due to the higher multiples and premiums in the marketplace. With optimal conditions, now may be a great time to sell a business or raise capital. Companies in growing industries with strong brand recognition remain the highest valued and the most sought after. Pet businesses are positioned in an attractive industry but need to maintain strong fundamentals such as a desirable product and excellent reputation in order to attract a strong valuation. Access to Capital PE Outlook The latest Pepperdine Private Capital Access Index quarterly report revealed that access to capital for businesses of all sizes increased in Q1 of 2014 from the previous quarter. IBISWorld reports the pet industry has a low to medium level of capital intensity, but a need for capital nonetheless. According to the American Pet Product Association (APPA), while the U.S. was suffering during the recession, the pet industry gained the heightened attention of private equity investors as it grew at more than a 5 percent year-over-year on average from 2007 to With relatively little risk and seemingly recession-proof growth, the pet industry will continue to attract PE attention. Number of Pet Deals by Quarter In Q1 of 2014 there have been 7 announced pet industry transactions, which has held steady from the 7 deals in Q4 of Over the past 8 quarters there has been an average of 7 pet industry deals per quarter, with a high of 11 deals in Q2 of 2013 and a low of 5 deals in Q1 of To learn more visit Sources: IBISWorld Industry Report, Pet Stores in the U.S., U.S. Pet Market Outlook, , 2014 Pepperdine Capital Markets Study, American Pet Product Association (APPA) 4 Securities offered through Colorado Financial Service Corporation. Member: FINRA-SIPC.

5 Carol Frank Managing Director Prior to joining SDR Ventures in 2009, Carol developed three multi-million dollar pet companies in retail, manufacturing, and distribution. She successfully built and sold all three companies, and possesses the rare combination of investment banking expertise and transactional experience in the pet industry. Carol began her career as a CPA with Ernst & Young and also spent three years as an executive recruiter for Robert Half International. She has a BBA in accounting from The University of Texas at Austin and an MBA from Southern Methodist University. Carol is a former board member of PIDA, PIJAC and The Pet Care Trust. As a registered investment banker, she also holds Series 79 and 63 licenses. SDR Core Services Transaction Advisory Pet Industry Sell-Side As former owners and operators, our principals have experienced the M&A world from the trenches. As investment bankers, our principals have gained the experience necessary to maximize value and facilitate a successful transaction. We know how to run an efficient and effective process, how to avoid pitfalls, how to maximize shareholder value, and how to minimize operational distractions. Pet Industry Buy-Side Whether growing your company organically with a wellplanned acquisition strategy or initiating an executive search to find the right company to buy and operate, our buy-side search process has proven extremely effective at generating responses, identifying "off-the-radar" opportunities, negotiating favorable deal terms, and closing deals in a timely manner. Capital Formation Placement Agent In the event that our debt solutions are not a fit for your strategic goals, SDR will act as a finder for debt and equity capital. Our goal is to identify the right capital and the right capital provider based on your needs. Strategic Advisory Unlike traditional investment banks, SDR views each client as a relationship rather than a transaction. Our passion is helping business owners maximize value in their business. While this often takes the form of advising on acquisitions, sales, and recapitalizations, we realize that not every business is ready for such a transaction. Our advisory services are designed to add value. Advisory engagements include (but are not limited to): Company Valuation Capital Strategy Exit Planning Shareholder Strategy 5 Securities offered through Colorado Financial Service Corporation. Member: FINRA-SIPC.