Oppenheimer Weighs In On Sprouts Farmers As An 'In Play' Target

On March 19, “Bloomberg reported that Albertsons Companies Inc ABS and Sprouts Farmers Market Inc SFM held preliminary merger talks with proposed plans to take SFM private. The article noted the talks are at an early stage and may not lead to a deal,” Oppenheimer’s Rupesh Parikh said in a note.

The analyst maintains a Perform rating on Sprouts Farmers Market.

Sprouts ‘In Play’

Following a meeting with management on March 16, Parikh expressed a more positive stance on Sprouts Farmers Market, while mentioning that management was upbeat regarding the business.

However, if the company is “in play,” the analyst expects Kroger Co KR and Whole Foods Market, Inc. WFM to 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. We expect WFM to be up in sympathy,” Parikh stated.

Whole Foods Versus Kroger

Using a mathematical model of a combination of Whole Foods and Sprouts Farmers Market, the analyst noted that a consolidation in the specialty grocery space might be warranted, although there still were major obstacles.

“We also do not believe SFM is in a rush to consummate a deal as a return to inflation and/or corporate tax reform could boost the company's valuation,” the analyst went on to say.

With regard to a bid from Kroger, Parikh believes the company “looks favorably upon the smaller format box as evidenced by the Lucky's partnership. Geographically, this would also remove a key market share grabbing competitor of KR boxes in a growing number of markets.”

On the other hand, Sprouts Farmers Market could be a compelling way for Whole Foods to achieve its goal of broadening its customer base.

“For us, the sticking point would be valuation especially if potentially bigger-pocketed rivals are in the mix,” the analyst added.

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Kroger Stands Its Ground In Price War With Wal-Mart, But Do Market Share Gains Offset Declining Comps? _________ Image Credit: By Littletung (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons