4 Reasons Sprouts Farmers Market Takeover Report Makes Sense

Thanks to volatility in food prices, Albertsons LLC's reported eye on a merger with Sprouts Farmers Market Inc SFM could be a golden opportunity for the bigger chain to add the organic grocer to a business that currently includes Safeway stores, analysts said Tuesday.

“Could be an opportunistic move by Albertson's,” said BMO Capital Markets, which called Albertsons' overtures (first reported by Bloomberg) “one of the most differentiated concepts in U.S. food retail.”

Downgrade Justification

BMO, which downgraded Sprouts to Market Perform, said the produce-heavy Sprouts had hit a rough patch because of “extreme produce deflation.”

“We believe this move by Albertsons, if accurate, could debunk the popular short thesis on SFM that its produce-led promotional strategy was flawed and easily replicated by traditional supermarkets,” BMO said.

BMO said there are other things to consider:

1. Whole Foods Market, Inc. WFM or Kroger Co KR could also be interested if Sprouts is indeed in play.
2. There is an awful lot of overlap in geography between Albertsons and Sprouts. It said 81 percent of Sprouts and Albertsons stores are within five miles of each other.
3. Both companies use KeHe Distributors, LLC, which could help distribution synergies.

BMO said that while it expects mergers and acquisitions to increase during a tough time for U.S. food retail, “we caution investors from extrapolating this news as a sign that Underperform-rated Whole Foods could elicit similar interest from potential larger enterprise value ($9.7 billion) and structural pricing challenges that go beyond the current challenging deflationary environment, in our view.”

Beyond BMO

Oppenheimer Holdings also weighed in on the possible merger, saying it also believed Kroger and Whole Foods would be interested. “We suspect 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.”

At time of publication, Sprouts shares were up 3.55 percent at $22.60.

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