PetSmart / Chewy: How BC Partners' $8.7B Retail LBO Was Rescued by the $3.35B Startup It Bought Two Years Later

Look at the retail LBO league table for 2005 to 2015 and it is a graveyard. Toys R Us (2005) — zero to LPs. Linens 'n Things (2006) — bankruptcy 2008. Mervyn's (2004) — bankruptcy 2008. Neiman Marcus (2005) — bankruptcy 2020. J. Crew (2011) — bankruptcy 2020. The pattern is so consistent that by early 2015, a mega-LBO of a US specialty retailer was more or less considered a broken model. The bond market priced it that way. Bankers pitched it that way. Any PE committee memo defending one had to spend two pages explaining why this time was different.

BC Partners closed the PetSmart LBO on March 11, 2015. Total transaction value of about $8.7 billion, financed with roughly $2.6 billion of sponsor equity and $6.2 billion of new debt — about 6.4× net debt to LTM adjusted EBITDA. It was the largest retail take-private since Toys R Us a decade earlier, and it was greeted with the appropriate degree of skepticism. Amazon was already halfway through eating pet-food distribution, PetSmart's store base of ~1,400 locations looked overbuilt, and the previous specialty-retail take-privates of the era had provided a discouraging body of evidence.

Eleven years later PetSmart is still privately held by BC Partners and its consortium, and the sponsors have already returned multiples of their original equity check — not through the usual dividend-recap-plus-IPO exit path, but by acquiring an unprofitable e-commerce competitor in 2017 for $3.35 billion, taking that competitor public in 2019 at a valuation matching the entire original PetSmart entry price, and using the IPO proceeds plus a subsequent split-off to monetize the embedded asset while keeping the parent whole. The mechanism is not one you see in a textbook. It is worth studying anyway, because it is a template for what to do when a retail LBO is one Amazon quarter away from being written down.

What the entry actually looked like

The proximate cause of the sale was activist pressure. Jana Partners disclosed a 9.9% stake in PetSmart on July 3, 2014 and pushed hard for a strategic review. Board resistance collapsed over the next several months, and on December 14, 2014 PetSmart announced a definitive merger agreement with Argos Holdings Inc. — a Delaware parent controlled by BC Partners — at $83.00 per share in cash. That was roughly a 39% premium to the unaffected September 2, 2014 price.

The consortium was unusually broad for a mega-LBO. BC Partners as lead sponsor. La Caisse de dépôt et placement du Québec, GIC Special Investments and StepStone Group as institutional co-investors. Longview Asset Management alongside. BC Partners also raised roughly $1.2 billion of additional LP co-investment on top of its fund commitment — a signal that the firm was trying to reduce concentration in what everyone knew was a contested sector call.

The sources & uses at close was very standard mid-2010s retail: term loan sized to the low-6× area, senior unsecured notes stacked on top, sponsor equity at ~30% of EV. What was not standard was where the deal was in the cycle. This was retail LBO leverage running roughly where the failed 2005-2007 vintage had run, on a business facing an unprecedented category disruption.

The first eighteen months — everything working

For a while the sponsors looked prescient. PetSmart executed against a fairly straightforward operational playbook: SKU rationalization, a labor-productivity push, pruning underperforming stores, and — critically — a large expansion of higher-margin services (grooming, training, veterinary partnerships with in-store clinics). The services layer is the part of the pet category that Amazon cannot ship. It is also the part with the best structural gross margins. EBITDA grew fast enough that PetSmart declared an approximately $800 million distribution to BC Partners and consortium co-investors in early 2016 — roughly 38% of the original sponsor equity check returned within about ten months of close.

That distribution was funded from operating cash flow, not from a fresh dividend-recap tranche of debt. Which meant the sponsors returned a third of their money without adding leverage — a genuinely favorable outcome and, in the MOIC vs IRR framework, a very early bump to interim IRR that carries forward through the rest of the hold. If the story had ended there, PetSmart would have been read as a modest early success and a template for how mid-2010s retail LBOs could work if you focused on services rather than SKU count.

The story did not end there. It ran into Chewy.

The disruptor problem — and the answer

Chewy launched in 2011. By 2016 it had built an approximately $900 million revenue business by matching Amazon on price and beating Amazon on category obsession — subscription auto-ship for pet food, a customer-service culture that sent hand-written sympathy cards when a pet died, next-day delivery on food and litter that solved the practical problem of hauling forty-pound bags of dog food home from a store. The 2016 numbers were the sort of curve that gets a PE-owned incumbent's attention: revenue nearly doubling year over year, gross margins improving, gross profit still deeply unprofitable at the net line because of aggressive marketing and warehouse buildout, but with a runway that pointed at real scale.

Standard incumbent response would have been to build a competing e-commerce channel and grind it out over five years. PetSmart's board, backed by BC Partners, chose the other option. On April 18, 2017 the two companies announced that PetSmart would acquire Chewy for approximately $3.35 billion — approximately 3.7× forward 2017 revenue, in a category where the target had never earned a profit. It was the largest e-commerce acquisition in history at the time, topping Walmart's $3.3 billion take-out of Jet.com the year before.

Two features of that deal to note. First, Chewy operated as an independent subsidiary. Co-founder Ryan Cohen stayed on as CEO and the two companies barely integrated at the front-end. That let Chewy keep its category focus and its customer-service culture while giving it access to PetSmart's balance sheet and (later) fulfillment footprint. Second, the acquisition was funded with a mix of new PetSmart debt and cash on hand, meaning it stacked on top of the LBO capital structure without a fresh equity injection from the sponsors. Total PetSmart consolidated leverage went up. The bondholders noticed.

Chewy revenue tripled inside the acquisition envelope, from ~$900M in 2016 to $2.1B in 2017 and $3.5B in 2018. The GAAP net loss narrowed from $338 million in 2017 to $268 million in 2018 — still losing money, but the trajectory was unambiguous. Somewhere in 2017-2018 it became obvious that inside a struggling levered pet retailer sat a fast-growing e-commerce business plausibly worth several times what PetSmart had paid for it eighteen months earlier.

That is when the transfer happened.

The 2018 "J. Crew-style" transfer

On June 4, 2018, PetSmart executed a two-step transaction that moved 36.5% of Chewy's equity out of the reach of PetSmart's bondholders. Twenty percent was dividended to a holding company controlled by BC Partners. Sixteen-and-a-half percent was contributed to a newly-formed unrestricted subsidiary of PetSmart — an entity that, by design, was not subject to the negative covenants in PetSmart's debt documents.

The label attached to this maneuver in the press was "J. Crew-style," a reference to the 2016 transaction in which J. Crew's PE owners moved the company's most valuable trademark IP into an unrestricted subsidiary and then borrowed against it, over their term-loan holders' loud objections. J. Crew's transaction turned on a series of narrow readings of the term-loan negative covenants that most participants had not previously believed would support that use. PetSmart's followed the same template on Chewy equity rather than IP.

Term-loan holders and bondholders — owed roughly $8 billion combined — sued. The core theory was that the transfers were fraudulent conveyances or covenant breaches designed to strip collateral from the credit box. The counter-theory was that PetSmart had read its covenants correctly, and that the "investments in unrestricted subsidiaries" basket accommodated exactly this sort of maneuver. Which side was legally right is a question the case did not fully test. In April 2019 the term-loan holders settled: PetSmart agreed to IPO Chewy and apply the sale proceeds to secured-debt paydown. The bondholders effectively took the Chewy IPO as their consideration for withdrawing the covenant claims.

Read the sequence as capital-structure engineering with legal teeth. The sponsors' insight was that Chewy — the acquired asset — had grown to the point where it was worth more separated from PetSmart's balance sheet than trapped inside it. The bondholders' insight was that the covenant package was supposed to prevent that separation. The April 2019 settlement was the price of moving forward: the sponsors kept the ability to IPO Chewy; the bondholders got the IPO proceeds. The result was that both sides could count the deal a win, and Chewy could go public.

The IPO — Chewy alone worth what PetSmart cost

Chewy priced its IPO on June 13, 2019 at $22.00 per share, above the $19-21 indicative range, offering 46.5 million Class A shares. The underwriters (Morgan Stanley, J.P. Morgan and Allen & Company as joint lead bookrunners) subsequently exercised the greenshoe in full for an additional 6,975,000 shares. Gross proceeds totaled approximately $1.176 billion. Of that, roughly $123 million went to Chewy for working capital; the balance — about $900 million net at the IPO price, closer to $1 billion including the greenshoe — went to PetSmart as selling shareholder and was applied to secured-debt paydown as required by the April 2019 settlement.

CHWY opened for trading on the NYSE on June 14 at $36.00 — a 64% pop from the IPO price. It touched $41.34 intraday before settling at $34.99 for a 59% first-day gain. At the IPO price of $22 the offering valued Chewy at approximately $8.8 billion. At the opening trade of $36 the market cap was approximately $14.3 billion.

Look at that number in the context of the entry. In March 2015 BC Partners had paid $8.7 billion enterprise value for the entire PetSmart franchise — every store, every service business, every warehouse. Four years later the market said one embedded asset PetSmart had bought in 2017 for $3.35 billion was worth $8.8 billion by itself at the offering price and $14.3 billion at first-day open. The Chewy carve-out via IPO priced the acquired subsidiary at approximately the same enterprise value as the entire parent LBO. PetSmart's remaining ~70% economic stake in Chewy was worth roughly $10 billion at first-day open — more than the LBO's entire original entry equity.

The dual-class share structure is what let the sponsors monetize that value without losing control. Chewy issued two classes of common: Class A (one vote per share, held by IPO investors) and Class B (ten votes per share, held by PetSmart). Post-IPO, PetSmart held approximately 70% of Chewy's total equity and about 77% of the combined voting power. That's a structure worth committing to memory for anyone modeling a PE-backed IPO of an embedded subsidiary: the sponsor can reduce economic exposure via secondary sell-downs over time while keeping voting control through the ten-to-one Class B. It is the debt capacity analog on the equity side — engineering the balance sheet to preserve optionality.

The 2020 split — direct ownership of the winner

Sixteen months later the sponsors did the second half of the maneuver. On October 22, 2020 BC Partners announced a $6 billion recap that would separate PetSmart and Chewy into two independently-owned businesses. PetSmart's remaining Chewy equity — the roughly 70% Class B stake — was distributed to BC Partners and consortium co-investors, formally removing Chewy from PetSmart's balance sheet. Simultaneously, PetSmart's standalone capital structure was refinanced with approximately $1.3 billion of new equity and $4.7 billion of new debt, extending maturities and reducing leverage against the (now Chewy-less) PetSmart business.

The bondholders sued again, using variations on the collateral-stripping theory that had been settled the previous year for a different transaction. That litigation was ultimately resolved out of court. Post-split, BC Partners held the Chewy stake directly (rather than through PetSmart) and could sell it down through open-market sales, block trades, or issuer buybacks without further parent-company complication.

Since 2020, BC Partners has steadily converted Class B super-voting shares into Class A and monetized in blocks. The most visible recent trade: in mid-2024 Chewy repurchased 17.55 million Class A shares from a BC Partners affiliate at $28.49 per share — a 5% discount to the market — for approximately $500 million. There have been several other block sales in the intervening period. Total realized proceeds to BC Partners and the consortium from the combination of the 2016 dividend, the 2019 IPO cash, and the subsequent Chewy sell-downs are firmly in the multiple-billion range on an original equity check of roughly $2.6 billion.

The deal is not closed. BC Partners still owns PetSmart standalone, still owns a Chewy stake, and has not fully realized. The final IRR will depend on where the last dollars land. But it is already clear the return will substantially exceed the roughly 0.0x MOIC that the retail LBO comp set — Toys R Us, Linens 'n Things, Mervyn's, J. Crew — would have suggested at entry.

Compare the retail LBO comp set

Since the essay opened with a retail-LBO graveyard, it is worth putting the comparison in one place. All four of these deals took specialty retailers private within a ten-year window on similar leverage assumptions. All four faced the same Amazon-driven category disruption. The outcomes are not similar.

Three of those four returned nothing to LPs. The fourth — the one taken private on comparable retail LBO leverage in the middle of the Amazon disruption cycle — is the one on track for a strong multiple. What separates it?

The direct answer is Chewy. But the deeper answer is that PetSmart's category structure permitted the acquisition. Toys R Us had no fast-growing pure-play e-commerce disruptor available to buy in 2013 — because there was no consolidator; Amazon simply ran the category directly. J. Crew had no such target. Neiman Marcus had no such target. In the pet category, a $900 million private company existed, was in growth mode, and was willing to sell to a strategic acquirer at a price that turned out to be a fraction of its ultimate public-market value. Without Chewy, PetSmart would probably have followed the same path as Toys R Us. With Chewy, it became one of the more interesting PE case studies of the decade — a demonstration that a struggling retail LBO can be rescued by acquiring the competitor that would otherwise disrupt it.

What this deal generalizes to

Three lessons worth carrying forward.

First: the value of a levered incumbent is bounded above by the ability of the sponsor to buy or build around the disruptor. In 2016 PetSmart looked like a slower Toys R Us. The difference in outcomes came from a $3.35 billion check that transformed the deal's exit optionality. If you are underwriting a retail LBO today, the diligence question is not "can this business defend against Amazon?" — the answer is almost always no, at least in-category. The question is "does the balance sheet, and the market for competitors, permit a defensive acquisition?" PetSmart had that door open. Toys R Us did not.

Second: an embedded, faster-growing subsidiary can be worth more than the parent — and can be monetized separately via IPO while keeping the parent whole. The Chewy IPO at $8.8B roughly matched the entire PetSmart entry EV. This is a structure PE has used before (VMware inside EMC / Dell), but PetSmart / Chewy is a particularly clean example because the subsidiary was acquired, not organic, and because the parent had to fight covenant litigation to complete the separation. Any deal where the acquired asset outgrows the platform should be examined against this template. The MOIC vs IRR math tips heavily in favor of the sponsor when the embedded asset carries most of the value creation.

Third: aggressive covenant reads on collateral transfer work — but they are expensive. The 2018 Chewy equity transfer produced roughly a year of litigation and a settlement (April 2019) that constrained how the sponsors monetized. The bondholders effectively got the IPO proceeds as their price for withdrawing the claim. Sponsors thinking about a J. Crew-style or PetSmart-style transfer should model the litigation timeline into the exit plan from day one, not assume the transfer will proceed unchallenged. And they should assume the settlement will require handing meaningful consideration to the credit side. This is exactly the sort of contingent obligation a lender-side model should scenario-flex — the same mechanic every debt capacity calculator is trying to make legible.

The practical takeaway

For most of the mid-2010s the PetSmart LBO looked like the kind of deal you would use as a case study in why retail LBOs don't work anymore. It bought at the wrong time, at the wrong leverage, in the wrong category, on the wrong side of the Amazon-secular curve. Every one of those framings was correct at the time. And they were all overridden by the sponsors' willingness to execute a very unusual defensive acquisition eighteen months into the hold.

The PetSmart / Chewy deal is now a case study in a different question: what to do when your platform investment is one Amazon quarter from a write-down. The answer, at least in this instance, was to spend $3.35 billion buying the disruptor rather than trying to compete with it, then use dual-class structuring, unrestricted-subsidiary mechanics and eventually an IPO to monetize the acquired asset separately from the parent. It is not a repeatable template for every retail LBO — most sectors don't have a $900M private disruptor available to buy. But when the conditions exist, it works.

Our All-in-One PE Model is built for exactly this class of deal — separate operating-company and acquired-subsidiary schedules, dual-class ownership tracking through an IPO event, covenant tests that account for restricted-vs-unrestricted subsidiary allocations, and a returns waterfall that decomposes value between the platform investment and a carved-out asset. See the sheet preview if you want to see how the parent-plus-embedded-subsidiary structure renders across the model.

The bigger lesson: retail LBOs are not a monolithic category. Category structure and the availability of defensive M&A targets matter as much as sponsor skill. PetSmart and Toys R Us look similar on the entry S&U. They ended up as opposite case studies for exactly one reason — the pet category had Chewy for sale, and the toy category did not.

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Sources:

1. PetSmart, Inc. Form DEFM14A (Feb 2015) — definitive merger proxy for the BC Partners acquisition, sec.gov — $83.00 per share, transaction structure, Argos Holdings / Argos Merger Sub, consortium composition
2. PetSmart 8-K exhibit (Mar 11, 2015) — closing announcement, sec.gov — deal close, financing summary
3. Chewy, Inc. Form 424B4 (June 13, 2019) — IPO final prospectus, sec.gov — $22 price, 46.5M Class A shares, dual-class structure, PetSmart 70% ownership / 77% voting power, use of proceeds
4. Chewy, Inc. Form S-1/A (June 3, 2019), sec.gov — Chewy revenue $2.1B (2017) and $3.5B (2018), net losses, corporate history
5. Chewy, Inc. Form 8-K (June 18, 2019) — IPO closing announcement, sec.gov — greenshoe exercise, closing details
6. BC Partners press release: "Consortium led by BC Partners to Acquire PetSmart for $83.00 per Share in Cash" (Dec 14, 2014), bcpartners.com — deal announcement, consortium composition
7. Forbes: "PetSmart's $8.7 Billion LBO Is Already Paying Off For Consortium Led By BC Partners" (Feb 18, 2016), forbes.com — $800M distribution, 6.4x leverage, early operational results
8. Private Equity International: "PetSmart distributes $800m to BC Partners and co-investors," privateequityinternational.com — 2016 distribution details
9. CNBC: "PetSmart is acquiring Chewy.com for $3.35 billion in largest e-commerce acquisition" (Apr 18, 2017), cnbc.com — Chewy acquisition price, comparison to Walmart-Jet.com
10. Forbes: "Fast-Growing Pet-Product Upstart Chewy Is Selling Out To PetSmart" (Apr 18, 2017), forbes.com — Chewy 2016 revenue $900M, 2017 forecast $1.5B, deal rationale
11. Bloomberg: "PetSmart Moves Part of Chewy.com Out of Creditors' Reach" (June 4, 2018), bloomberg.com — the 36.5% Chewy equity transfer, J. Crew comparison
12. King & Spalding: "HOW DID THEY DO IT? PetSmart & The Phantom Guarantee," kslaw.com — legal analysis of the 2018 covenant maneuver
13. CNBC: "Chewy, PetSmart's online business, soars as much 86% after IPO pricing at $22 per share" (June 14, 2019), cnbc.com — first-day trading, valuation
14. Yahoo Finance: "Chewy IPO: Shares jump 64% above IPO price, open at $36.00 each" (June 14, 2019), finance.yahoo.com — opening price, first-day close, $14.3B opening market cap
15. Bloomberg: "BC Partners to Split PetSmart, Chewy in $6 Billion Recap Deal" (Oct 22, 2020), bloomberg.com — 2020 recap and split, $1.3B equity + $4.7B debt
16. PitchBook: "BC Partners to split up PetSmart, Chewy with $6B recap," pitchbook.com — recap structure, separation of businesses
17. Fortune: "PetSmart and Chewy are splitting three years after their tie-up" (Oct 23, 2020), fortune.com — split narrative and rationale