No mega-deal after all?

Talks between the two giants in US pet supplies retailing, Petco and PetSmart, regarding a takeover of Petco by its fiercest competitor have once again hit the buffers, according to reports in the American media at the start of October. The reason given was the antitrust difficulties posed by such a deal. 

The two companies were at odds over the question of who would assume the financial risk if the deal were to founder for reasons relating to cartel legislation. Petco turned down a proposal to compensate PetSmart in the event that the Federal Trade Commission (FTC) asked for excessive store closures to allow the deal to go through, according to media reports.
The sticking point is uncertainty over how the cartel authorities will define the pet supplies market. If it was limited to speciality retailers only, the deal would probably require more concessions to the FTC. At present, the volume of sales of the two leading pet store chains accounts for 30 per cent of the American pet supplies trade. Industry experts point out that stores belonging to the two chains are located in close proximity for the most part, with at least half of the Petco stores situated no more than three miles from the nearest PetSmart outlet. 
If other companies that sell pet products are included in the definition, for example mass merchandisers like Wal-Mart, the experts believe that a merger between PetSmart and Petco would be more likely to receive consent. The talk is that Petco has asked private equity firms in the meantime to submit their final acquisition offers in the coming weeks. Nevertheless, both PetSmart and Petco are expected to retain a basic interest in a merger.

The uncertainty over how the cartel authorities will react has increased as a result of the latest decisions relating to the consumer goods industry, in which done deals had to be reversed because of a veto by the cartel authorities. And those in the know have brought up another factor: if PetSmart and Petco were to merge, a massive debt mountain would be created that would have to be paid off. They are thus advising the two chains to rethink their business model and become more involved in special niches in the future to increase…