A Final(?) Thought on the Defunct PetSmart/Petco Merger


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It has been several months since PetSmart and Petco walked away from their discussions about a possible merger, but a recent ruling on the long-pending consolidation between Staples and Office Depot got me thinking about what could have been. Some might find the conclusion I came to a bit surprising.

About two weeks ago, a federal judge sided with the Federal Trade Commission (FTC) in blocking Staples' acquisition of Office Depot for a reported $6.3 billion. While this was certainly bad news for the two office-supply retailers, it may indicate that a Petco/PetSmart deal would have gotten a friendlier reception from regulators. That is because the ruling focused on the business-to-business portion of Staples' and Office Depot's business. 

“The Court finds that Plaintiffs have met their burden of showing that there is a reasonable probability that the proposed merger will substantially impair competition in the sale and distribution of consumable office supplies to large Business-to-Business,”  wrote U.S. District Judge Emmet G. Sullivan in his ruling. (The emphasis is ours.)

In fact, consumer retail sales were not mentioned in any of the reports I have read about the blocked deal. From where I'm sitting, that makes a lot of sense. If the ruling had focused on retail sales, the two companies could have argued that a wide variety of retail outlets—from Walmart to corner drug stores to supermarkets—compete in the same marketplace, and thus the merger would not have significantly suppressed competition.

I believe that speaks volumes about the prospects for a Petco/PetSmart deal to get past regulatory challenges. After all, neither Petco nor PetSmart has a commercial business-to-business aspect, and it would be hard to argue that the two pet superstore chains do not face significant competition from many of the same outlets that deal in office supplies. As a result, it is easy to imagine a merger ultimately being blessed by regulators.

Obviously, hindsight is 20/20, and the stars clearly were not aligned for Petco and PetSmart when they went to the negotiating table last year. But could the lessons learned from the failed Staples/Office Depot deal grease the wheels for another attempt at consolidation in the future? Only time will tell, but I have a strong feeling this isn't the last time we'll be considering the prospect of a combined Petco and PetSmart.

 

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