updated 7/14/2006 4:19:22 PM ET 2006-07-14T20:19:22

Petco Animal Supplies Inc., the nation’s second-biggest pet supplies retail chain, said Friday it has agreed to be acquired for about $1.68 billion by a private investment group. Its shares climbed 44 percent.

The deal marked the latest example of the attraction that solid retail cash flows and real estate assets have for private equity investors.

The investor firms Leonard Green & Partners LP and Texas Pacific Group are offering $29 per share in cash for Petco, a 45 percent premium over its closing price of $19.45 on Thursday.

For Leonard Green, the purchase marks a something of full circle. The Los Angeles firm was a part-owner of Petco before the retailer went public in February 2002.

Shares of pet retailers have suffered amid concern about high gas prices. Petco’s stock had fallen in half since January 2005.

The private equity firms likely saw investor disfavor as a buying opportunity, said David Schick, an analyst at Stifel, Nicolaus & Co., a brokerage firm in New York.

“They know that there are good cycles and bad cycles,” Schick said. “You want to buy when it’s getting worse and sell when it’s getting better.”

A spokesman for the private firms, Owen Blicksilver, said the buyers declined to comment on the sale.

Petco, based in San Diego, said its board unanimously approved the proposed deal. The transaction is expected to close by this year’s fourth quarter, pending shareholder and regulatory approval.

Petco shares climbed $8.46 to $27.91 in late afternoon trading on the Nasdaq Stock Market.

The buyers would also assume about $120 million in debt in the deal, Petco said. That would boost the total value of the transaction to $1.8 billion.

Petco is second only to PetSmart Inc. among the nation’s biggest pet supply retailers. Petco sells pet food, supplies and services with over 775 stores in 47 states and the District of Columbia.

PetSmart, based in Phoenix, will benefit from Petco’s new ownership, Schick said. He predicted that a privately owned Petco will be less inclined to cut prices to bolster sales and feel less pressure to expand. The sale will also boost the value that investors put on PetSmart.

Private equity groups have made several other recent plays for other retailers.

Blackstone Group and Bain Capital agreed to acquire arts and crafts retailer Michaels Stores Inc. for $6 billion in June. Texas Pacific Group and another private equity player Warburg Pincus teamed up in 2005 to purchase luxury department store chain Neiman Marcus Group Inc. for $5.1 billion.

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