There are several large food makers and department stores that are sitting on huge amounts of cash but have been saddled with consistently low growth.
These companies, which include Kellogg Company (NYSE:K), Campbell Soup Company (NYSE:CPB), General Mills, Inc. (NYSE:GIS), Kraft Heinz Foods Co (NYSE:HNZ), Wal-Mart Stores Inc (NYSE:WMT) and Target Corporation (NYSE:TGT), will naturally look for takeover targets that could meaningfully accelerate their growth.
For the dinosaur food makers named above, grocery store chains Whole Foods Market, Inc. (NASDAQ:WFM) and Sprouts Farmers Market Inc (NASDAQ:SFM) could become takeover targets, while Wayfair Inc (NSYE:W) could do the job for one of the slow growth department store chains.
Investors should buy WFM, SFM and W ahead of potential new M&A activity involving all three companies. Here’s what you need to know about each of these stocks to buy:
Stocks to Buy: Sprouts Farmers Market Inc (SFM)
Grocery store chain Albertsons, owned by private equity firm Cerberus Capital Management, recently held preliminary talks about conducting an M&A transaction with SFM, which specializes in fresh and organic food.
There has been some speculation that two other supermarket chains, Kroger Co (NYSE:KR) and WFM, could be interested in buying Sprouts.
But Sprouts could also become a takeover target for one or more of the dinosaur food makers, creating an intense bidding war and lifting SFM stock well above current levels.
By buying Sprouts, K, CPB, GIS or HNZ would acquire a fast growing, natural/organic supermarket chain that has a customer base with “favorable demographics” and has its own brand of food products, called Sprouts Brand. Using their leverage and relationships with other grocery chains, the food dinosaurs may be able to rename and then distribute Sprouts Brand products to these other grocery chains.
Additionally, the dinosaurs might be able to combine their own products and expertise with those of SFM to create new, interesting and popular offerings. And of course the food makers would be able to give their own products prime shelf space and advertising within Sprouts’ stores, likely increasing the revenue that their products generate from Sprouts’ customers.
Furthermore, Sprouts has room “to build many more stores.” The food dinosaurs can use their massive cash hoard to enable SFM to accelerate its expansion. Given Sprouts’ relatively low market cap of $3 billion, any one of them should be able to easily carry out an M&A transaction involving the grocery store chain.
Stocks to Buy: Whole Foods Market, Inc. (WFM)
Whole Foods is another grocery store chain that could easily become a takeover target for food makers.
WFM has a number of similarities, advantages, and disadvantages versus Sprouts when it comes to its appeal as a takeover target for the legacy food makers. Like SFM, Whole Foods specializes in fresh and organic food and presumably also tends to attract a large number of customers in favorable demographic groups, i.e., relatively wealthy people.
Also like SFM, WFM has its own food brand. But since Whole Foods has many more stores than SFM, its food brand is presumably much more widespread and much better known than Sprout’s brand. Moreover, WFM would provide a much larger platform for one of the legacy food makers to push its products.
On the negative side, however, Whole Foods is not growing as quickly as SFM and it is closing stores, not poised to open more. WFM has a market cap of around $9 billion, making it much more expensive than SFM; however, given the market caps of Kellogg, Campbell Soup, General Mills and Kraft Heinz, which range from about $17.5 billion to $35 billion, all of them could probably afford the deal, especially if they partner with private equity firms.
Stocks to Buy: Wayfair Inc (W)
Wayfair’s website enables many suppliers to sell home products and furniture online. W stock seems to be doing pretty well, as its revenue in the fourth quarter of 2016 rose 40% year-over-year to $959 million.
Moreover, according to private equity firm Bain Capital, home products was one of the fastest growing retail categories during the last holiday season.
With the growth of Target’s e-commerce unit slowing and Walmart looking to make acquisitions that would enable it to sell more products online, Wayfair would be a good M&A target for either of the two hobbled retail giants.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
