Reports have emerged of a potential merger between grocery giant Albertsons and Sprouts Farmers Markets (NASDAQ:SFM). According to sources that asked to remain anonymous, the discussions are at an early stage and may not lead to a deal. Some analysts are estimating Sprouts could fetch around $26 per share in deal. That would be an 18 percent premium to its last closing price.
Investors appeared to be shrugging off the reports, with Sprouts shares virtually unchanged in early trading Monday. Shares in Sprouts were $21.99 at 10:01 a.m. in New York, valuing the company at about $3 billion. If Albertsons were to acquire Sprouts, it could go private. Albertsons spokeswoman Chris Wilcox said of the matter, “We don’t comment on rumors or speculation.”
Sprouts Farmers Markets is known for a large selection of organic produce priced below other chains like Whole Foods Market. Sprouts currently operates more than 250 stores in 13 states. Sprouts reported net sales of $986 million in its latest quarterly earnings release, a six percent increase over the same period in 2015. The company reported comparable store sales growth of 0.7 percent for the quarter.
Many experts are saying that shrinking profits in the supermarket industry could lead to a wave of industry consolidation. Price deflation is cutting into supermarkets’ margins while they are facing more competition than ever. Online stores, discounters, and specialty stores are all gaining ground against traditional grocers. The fight has resulted in the Kroger Co., the largest U.S. grocery chain posting negative same-store sales, excluding fuel, for the first time in more than a decade in the fourth quarter.
To better compete, some traditional supermarkets are expanding their product line-ups to include more natural and organic items. That’s put pressure on natural grocers to cut prices to better compete with the mainstream retailers. Sprouts’ chief executive officer Amin Maredia said in September that the deep price cuts driven by deflation were “not sustainable.”
This would not be the first large deal for Albertsons. The company completed a deal in 2015 to acquire Safeway Inc. for about $9.2 billion. However, a sale of Sprouts may attract multiple suitors and lead to a competitive bidding process that could push its valuation even higher.