Grocery war looming? Analysts see several potential Sprouts bidders

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A new kind of grocer war could be in the works…

Albertsons, the company behind grocers like Safeway and Vons, has reportedly held preliminary talks to merge with Arizona-based Sprouts Farmers Market. And now some are speculating that Krogers and Whole Foods Market could also be interested.

Rupesh Parikh, an analyst at Oppenheimer, reckons that “to the extent Sprouts Farmers Market is in play, we would expect Korgers and Whole Foods to also be interested”. He added that an offer in the “a high $20′s-low $30′s range would be a minimum to get a deal done, as industry valuations currently are depressed due in part to deflationary pressures.”

Sprouts shares are currently trading at $21.88 a share, after rallying more than 20 per cent last week.

Sprouts is considered one of a few high quality growth names in the grocery space and reported a 0.7 per cent increase in like-for-like sales in the fourth quarter, against expectations for a drop. By comparison, Whole Foods said like-for-like sales fell a larger-than-expected 2.4 per cent in its last reporting period, and Kroger, which has previously hinted that it is open to M&A, said comparable sales slid 0.7 per cent.

An increasing number of entrants to the organic foods sector and falling food prices have weighed on sales and profits at grocers over the past year, with upscale names like Whole Foods competing with smaller rivals like Trader Joe’s and retailers like Walmart, which have expanded their organic food offerings. To better compete, Whole Foods has begun offering discounts and launched a cheaper format store called Whole Foods 365 aimed at millennials.

Mr Parikh notes that in the case of Whole Foods, a deal for Sprouts could help it achieve its goals but “the sticking point would be valuation especially if potentially bigger-pocketed rivals are in the mix.” He also noted that the “math does not appear compelling”.

A deal could make more sense for Kroger said Mr Parikh as the chain has been looking to expand through smaller format stores, and last year struck a partnership with Colorado-based grocer Lucky’s Market. Acquiring Sprouts would also remove a key market share grabbing competitor and fill a gap in its portfolio, he said.

A buyout could be possible at $26 a share, Christopher Mandeville, an analyst at Jefferies noted.

“If Sprouts Farmers Market is willing to sell itself, we expect multiple suitors (financial and strategic) and a competitive bidding process that could potentially push valuation higher,” he added.

Cerebrus Capital Management, the private equity group backing Albertsons declined to comment. Meanwhile, Sprouts and Albertsons could not immediately be reached for comment.

News of the talks was first reported by Bloomberg.

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