Dealmakers Look to Bite into Pet Food

Gone are the days when generic kibble was king and most pet food included bizarre ingredients only manufacturers understood. Today’s pet food industry has morphed into a healthier smorgasbord for dogs, cats and other animals and their owners are willing to pay for it.

Just ask Charlie Nelson, CEO of KLN Family Brands, a third-generation Northern Minnesota company that sells premium pet food, treats, food toppers and freeze-dried products under its NutriSource, Finley’s and Natural Planet brands.

“We learned rather quickly we probably weren’t going to be able to make it if we stayed in the economy space,” Nelson says. “We knew if we wanted to do business across the country, we would have to make premium products.”

KLN focuses on “high-end ingredients and probiotics and gut health” when developing its offerings. The company also runs its own manufacturing facilities, an attractive attribute to numerous potential strategic and private equity buyers. They call Nelson frequently, he says, even though KLN has no current plans to sell. “Quite honestly I probably delete 99 percent of the voicemails before I get a chance to listen to them,” he adds.

KLN isn’t the only one receiving calls. Innovative pet food makers peddling an improved animal lifestyle are getting barraged by prospective buyers looking to enter the global $134 billion industry. “The pet space will remain a very active sector for investment in M&A,” predicts Leigh Randall, managing partner at Topspin Consumer Partners, a private equity firm in Mamaroneck, N.Y.

In May 2023, Topspin acquired the consumer products division of Three Dog Bakery, a creator of human-like soft-baked dog cookies made with dried apples, rolled oats and other wholesome ingredients. “The company began to grab significant market share, so it stood out as a business that had distinctiveness in a crowded category,” says Randall, the owner of two Australian Labradoodles. “We have big expansion plans and are excited about the long-term potential of the company.”

Private equity firms accounted for 50 percent of acquirers in the pet food sector last year, down from 60 percent the year before, notes Scott Mitchell, managing director of SDR Ventures, an investment bank in Greenwood Village, Colo. Challenging credit markets slowed M&A across most industries. Still, he says, “2023 was a record year for pet food deals.”

Last year, among others, publicly traded Post Holdings (NYSE: POST) acquired Perfection Pet Foods for $235 million; A&M Capital Partners-backed BrightPet Nutrition Group bought Raw Advantage Processing, a maker of raw pet food and treats; and private equity-backed Antelope snagged My Perfect Pet, a “gently cooked” dog and cat food brand.

“There is still a lot of activity in these new formats: the fresh, the freeze-dried, the frozen raw or the human grade,” says Tom Elliott, managing director of Boston investment bank Capstone Partners, and the owner of Dublyn, a soft-coated Wheaten Terrier.

In February 2023, Beach Point Capital Management took a controlling stake in Wet Noses, a Seattle-area maker of human-grade dog treats and food. In a true rags-to-riches story, cash-strapped teenager Jasmine Galligan began baking healthy treats for her own dog. Neighbors and friends demanded more. She later realized she could create a dog treat business and launched the company in 1998. Investors, including Beach Point, obtained partial stakes in Wet Noses in 2020, but three years later Beach Point took over and hired Galligan back as CEO.

Prior to selling, Galligan was contacted repeatedly by potential buyers, but wasn’t ready. “I didn’t start the business with an exit strategy,” she notes.

Pet Food Turns Premium

The pet food industry, which includes food, treats and according to some, pet supplements, the latter of which have also seen acquisition interest, is clearly still in its prime. Today’s pet owners, many of them Millennials or younger, “humanize” their pets and desire better food alternatives. Roughly 66 percent of U.S. households own a pet, reports Statista, and spending has mushroomed. These owners buy alternative-formatted food, nourishing treats and flavorful supplements, products plugged thoughtfully by marketing masterminds.

Bocce’s Bakery, a limited-ingredient pet treat business also owned by Antelope, makes creatively named treats “all sourced in the USA local to our bakeries,” Bocce’s touts on its website. Which dog owners wouldn’t want “Wild Berry Biscotti” treats or “Sauvignon Bark” biscuits? These mouth-watering options can generate company profits, and make businesses appealing to strategic or financial buyers enamored with pet food’s recurring revenue, steady growth and recession-proof image.

“We’re still in the very early innings of seeing lower-middle-market food deals,” states SDR’s Mitchell.

These reasons, along with the ease of buying pet food from online sites like Chewy (NYSE: CHWY) and Amazon (Nasdaq: AMZN), have revamped an industry and opened the door for companies like California-based Wild Earth Inc., a vegan dog food and supplement business launched in 2017. Wild Earth raised funds from Shark Tank’s Mark Cuban and other investors, and eventually may need even deeper pockets to scale.

“These founders and entrepreneurs are really passionate about what they do,” says Carol Frank, founder of BirdsEye Advisory Group, a Colorado-based advisory firm focused solely on pet M&A. “We’re not selling spoons or knives or water bottles. We’re selling people’s hearts and souls.” BirdsEye advised Three Dog Bakery on its sale to Topspin last year, and Frank says all founders she has advised in this sector are pet owners themselves.

What’s to Come

“There has been some pent-up demand for sellers who wanted to sell and were holding off in 2023,” Frank says. “We’ve got a deal closing by the end of Q1 and are in conversations with multiple companies.”

New-fangled pet food makers see a long runway ahead. Frozen/refrigerated pet food comprises only five percent of today’s pet food market, compared to 65 percent for dry kibble, notes Packaged Facts, in its 2023 Pet Food in the U.S. report. The research arm predicts fresh pet foods may reach nearly $5 billion in sales by 2027 compared to about $2.8 billion in 2023, while freeze-dried and air-dried foods may reach $4 billion by 2027, compared to about $1.8 billion in 2023.

But challenges remain for new market entrants, and those looking to grow. “It’s becoming a very crowded space and it’s hard to differentiate and it is costing more and more money to build a loyal customer base,” Frank acknowledges. Fresh and frozen food makers find this business grueling and costly since food must be kept cold from start to finish. “Pet food is an expensive proposition. It takes capital,” she says.

Slowing adoption rates, supply-chain stress and global instability could also test the pet food sector, SDR Ventures reports. Company founders need to find their consumer niche, and “hone in on that demographic and what they like and are looking for,” Mitchell says.

Wisconsin premium food company Stella & Chewy’s now offers its “Wild Red Raw Coated Kibble.” Other manufacturers are concocting similar but different products. The sky’s the limit, it seems.

KLN Family Brands, like many other pet food makers, is keeping pace. Its plant-based dog treats, Natural Planet “Puffs”, are made with spinach, carrots and sweet potato. Even its Whitefish Meal and Rice, one of its lowest-cost kibbles, boasts a strong, real fish flavor that most dogs devour. While an obvious M&A target, Perham, Minn.-based KLN plans to stay independent for now, largely because Nelson and his employees have deep roots in the small farming community.

“We remain a family-owned business, and people trust that and believe in that,” he says. “And we will remain a prominent employer in Perham for generations to come.”