PetSmart (PETM)/ Petco Potential Merger Has Over 50% Chance of Approval, Says Wedbush

Wedbush reiterated a Neutral rating on PetSmart (NASDAQ: PETM) with a price target of $64. Analyst Seth Basham still sees potential for an acquisition by Petco, but he noted potential regulator hurdles.

"A couple of weeks ago we assumed coverage on PetSmart and rated an acquisition of Petco a 20% probability in the next year, based on our initial analysis. In light of recent activist involvement in the name, we redoubled our analysis and delved much deeper into the key issues involved in such a major transaction, which we explore in this report," said Basham. "Our conclusion remains largely the same: we see this as the best potential strategic action for the company, potentially adding at least 30% EPS accretion and at most, that amount to shares from current levels given more limited EBITDA accretion. On a probability-weighted basis, we see this potential upside or a leveraged buyback largely priced into shares, keeping us neutral on PETM."

"There are significant FTC hurdles to clear before a transaction with Petco would be possible, but we see a better than 50% chance of approval. Much of the FTC’s decision will depend on market definition and we believe a broad definition, as in the ODP-OMX case, is possible. Further supporting approval, our pricing study points to price consistency regardless of each other’s market presence, with growing online and offline channel competition dictating competitive pricing in all markets. We are hosting a conference call today with an anti-trust expert to evaluate these issues," he added.

For an analyst ratings summary and ratings history on PetSmart click here. For more ratings news on PetSmart click here.

Shares of PetSmart closed at $68.75 yesterday.

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