Dogged determination Marks firms' reacquisition of Petco.

For animal lovers and investment banks, the numbers are equally compelling: Americans will spend roughly $38 billion on pet supplies, food, and veterinary care this year, a 35 percent jump in the past five years.

That's because 60 percent of all U.S. households own a pet, according to the Pet Products Manufacturers Association, an industry trade group.

Those statistics are all that's needed to understand why two of the savviest investment finns--Los Angeles-based Leonard Green & Partners LP and Fort Worth-based Texas Pacific Group--snapped up Petco Animal Supplies Inc. for the second time in six years.

San Diego-based Petco's stock had plummeted nearly 50 percent in the past two years, largely due to competitive and pricing pressures from larger rival Pet Smart Inc., based in Phoenix.

The two buyout firms agreed to pay $1.7 billion to take Petco private. The $29 a share buyout represents a 49 percent premium over Petco's stock price of $19.45 a share on July 13, the day before the deal was announced. To eliminate a competitor from edging out their bid, there's a break-up fee of between $30 million to $50 million if a competing bid emerges.

'They're taking advantage of the fact that it's a rocky market right now and they came in at a heavy premium above the market," said investment banker Lloyd Greif, president and chief executive of Greif & Co. "The price they paid was high enough to scare off the competition."

The same two firms bought Petco in 2000 for $624 million, or $22 a share, and took it public again in 2002. They generated a nearly 500 percent gain on an original equity investment of $190 million.

The first order of business in reinvigorating the chain will be to review Petco's 800 stores with a specific focus on the 100 to 200 stores where it competes head-to-head against the larger Pet Smart as well as Wal-Mart Stores Inc. and Target Corp. Analysts expect many stores that fail to meet certain profitability targets will be closed.

Petco's first quarter net income fell 36 percent to $11 million, on a 9 percent jump in sales to $521 million. The company began cutting prices last year, which caused profit margins to weaken.

The first time around, Petco's major shareholders included not only Leonard Green and Texas Pacific but Los Angeles investment giant TCW Inc. and law firm Latham & Watkins.

KATE BERRY Staff Reporter