Grocery Stocks: More M&A on the Way?

by Will Ashworth | July 11, 2013 11:52 am

Grocery Stocks: More M&A on the Way?

Tuesday’s announcement that Kroger (KR[1]) is buying Harris Teeter¬†(HTSI[2])¬†for $2.5 billion[3] is the most recent example of the consolidation movement continuing to take place within the grocery store industry.

Seems like everyone’s trying to keep pace with Walmart (WMT[4]).

While Kroger’s move doesn’t necessarily mean we’ll see another big M&A deal soon, the broader industry’s issues say it’s not a terribly unlikely thought. So, who’ll be the next acquisition? Here are some intriguing possibilities:

Fresh & Easy

Stores magazine, the National Retail Federation’s industry publication, ranked Fresh & Easy 11th in its 2012 edition of America’s Hot 100 Retailers.

How times have changed.

In April, Tesco PLC (TSCDY[5]), the UK’s largest retailer,[6] announced that it was exiting the U.S. market, where its foray into California, Arizona and Nevada was an unmitigated disaster. Taking a $1.8 billion write-off, Tesco has put Fresh & Easy up for sale.

The likeliest buyer appears to be Ron Burkle, the California billionaire who has a long history in the grocery business. Back in 2007, Burkle was the largest shareholder of Wild Oats, which was sold to Whole Foods (WFM[7]) for $565 million. Wild Oats’ retail locations were sold to Kroger, Trader Joe’s and Gelsons, while the name and trademarks ended up with former 7-Eleven and Blockbuster CEO Jim Keyes.

Keyes is expected to become the head of a grocery chain that could include Fresh & Easy, A&P and Pathmark. Whether they all operate under the existing banners or are folded into Wild Oats is difficult to know at this point. However, if it all comes together, you can be sure an IPO won’t be too far off.

H-E-B

In the biggest long shot of them all, I’m going to suggest that Charles Butt and family sell their beloved H-E-B Grocery Stores in Texas to employee-owned, Florida-based Publix for a boatload of money. Texas and Florida both have a large Latino population, and both companies are well equipped to serve this demographic.

According to Progressive Grocer magazine, Publix had $23 billion in revenue in 2012 compared to $13 billion for H-E-B. The combination would likely vault Publix ahead of Safeway (SWY[8]) into the third position amongst the nation’s largest grocery retailers. Both chains are non-unionized, making the integration easier. However, I would imagine the two would continue to operate under separate banners with most synergies obtained through logistics and buying rather than reduced overhead.

Although Publix is currently the largest employee-owned business in the U.S., it’s possible under this scenario that Publix could take the company public, providing employee shareholders — working and retired — an exit strategy. As it stands now, the company must buy back shares from employees upon retirement.

Something to think about: Given that Kroger paid 0.55 times sales for Harris Teeter, a merged Publix/H-E-B could be worth $20 billion, providing between $4-$8 billion in an IPO, which would no doubt be one of the 25 largest IPOs in U.S. history. It likely won’t happen in my lifetime, but that would be one heck of a merger.

Sprouts Farmers Markets

The No. 1-ranked company on the NRF’s Hot 100 Retailers list is Sprouts Farmers Markets, a grocery store with 150 locations spread across eight states that was acquired by Apollo Global Management (APO[9]) and other partners in 2011. With annual revenue of more than $2 billion, Apollo has filed a registration statement to take it public.

Already public is The Fresh Market (TFM[10]), primarily an East Coast chain with annual revenues of $1.3 billion spread over 25 states and 129 locations. Both TFM and Sprouts have store sizes between 20,000 square feet and 28,000 square feet focusing on higher-margin, quality products. There’s enough overlap that the cost savings would be significant; not to mention they’d create a truly national chain.

Sobeys

Safeway (SWY[8]) announced in June that it was selling its 213 Canadian stores to Sobeys Inc., a subsidiary of Nova Scotia-based Empire Company. The deal was a win/win for both companies. Empire, which trades on the Toronto Stock Exchange, becomes a national grocery store while Safeway exits with a fair price.

The deal came as a shock to me and probably most Canadians because it was expected that Canada’s other two grocery stores — Metro (MTRAF[11]) and Loblaw Companies (LBLCF[12]) — would duke it out for Safeway’s profitable Canadian division. But Empire snuck in and made an offer Safeway couldn’t refuse.

Overwaitea

If I were a betting man, I’d expect Metro or Loblaws or both to make a play for Vancouver’s Overwaitea Food Group, which is owned by billionaire Jim Pattison, Canada’s third-wealthiest person, according to Forbes. With 125 stores operating under six brands in Western Canada, it’s about the only big acquisition left.

Bottom Line

Up until the Kroger and Safeway deals, it looked as though the inevitable consolidation that befalls most industries, would pass by the grocery business. Now, with only half the year gone, it appears the M&A game is just getting started.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Endnotes:
  1. KR: http://studio-5.financialcontent.com/investplace/quote?Symbol=KR
  2. HTSI: http://studio-5.financialcontent.com/investplace/quote?Symbol=HTSI
  3. for $2.5 billion: http://investorplace.com/2013/07/kroger-buys-harris-teeter-a-smart-move/
  4. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  5. TSCDY: http://studio-5.financialcontent.com/investplace/quote?Symbol=TSCDY
  6. UK’s largest retailer,: http://www.progressivegrocer.com/top-stories/headlines/regional-supermarket-chains/id38866/tesco-confirms-exit-from-fresh-easy-business/
  7. WFM: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFM
  8. SWY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWY
  9. APO: http://studio-5.financialcontent.com/investplace/quote?Symbol=APO
  10. TFM: http://studio-5.financialcontent.com/investplace/quote?Symbol=TFM
  11. MTRAF: http://studio-5.financialcontent.com/investplace/quote?Symbol=MTRAF
  12. LBLCF: http://studio-5.financialcontent.com/investplace/quote?Symbol=LBLCF

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