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

On March 19, “Bloomberg reported that Albertsons Companies Inc (NYSE: ABS) and Sprouts Farmers Market Inc (NASDAQ: 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 (NYSE: KR) and Whole Foods Market, Inc. (NASDAQ: 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.

Related Link:

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