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Arden to Ingles Beckon as Supermarket Targets: Real M&A

Arden to Ingles Beckon as Buyers Shop for Supermarkets
In addition to big-box retailers Wal-Mart, Costco Wholesale Corp. and Target Corp., grocers also have to compete with upscale purveyors including Whole Foods Market Inc., William Blair & Co.'s Tim Carroll said. Photographer: Daniel Acker/Bloomberg News.

A surge in supermarket takeovers means grocers from Arden Group Inc. to Ingles Markets Inc. may be next in the shopping cart.

Kroger Co.’s bid this month for Harris Teeter Supermarkets Inc. helped drive year-to-date acquisitions of North American food retailers to $9.3 billion, the highest since 2006, according to data compiled by Bloomberg. Supermarket operators need to pursue more deals to boost revenue in a slow-growth industry beset by competitors that include discount retailer Wal-Mart Stores Inc., said Wolfe Research LLC, which sees Kroger and Royal Ahold NV as the most active buyers.

“It’s surely an industry that’s needed to be consolidated desperately,” Scott Mushkin, a New York-based analyst at Wolfe, said in a phone interview. “You’re fighting over a pie that’s really just not growing that much, so that does put pressure on some operators” to seek combinations.

Arden, a $400 million grocer with stores in California, said this month it’s weighing a sale. Ingles, a larger chain operating in the southeastern U.S., may attract interest from suitors including Delhaize Group SA and could fetch a 34 percent premium, according to Gabelli & Co. Private-equity firms also may be lured to Ingles’ real estate, said shareholder Vericimetry Advisors LLC.

Kroger, the largest U.S. grocery-store chain, said this month it would pay $2.5 billion for Matthews, North Carolina-based Harris Teeter to bolster its presence in the Southeast.

Heating Up

The transaction was among 14 announced for North American food retailers this year for a total value of $9.3 billion, up from $702 million in all of 2012, according to data compiled by Bloomberg.

Supermarket operators are seeking acquisitions to boost revenue and reduce costs as more retailers fight for shoppers’ dollars, according to Tim Carroll, a Chicago-based managing director in the consumer and retail investment banking group of William Blair & Co.

In addition to big-box retailers Wal-Mart, Costco Wholesale Corp. and Target Corp., grocers also have to compete with upscale purveyors including Whole Foods Market Inc., Carroll said in a phone interview.

“Scale is really critical for everybody,” he said. For larger traditional operators, adding stores organically “isn’t going to move the needle that much. People are trying to look for ways to buy things.”

Exploring Options

Arden, which operates Gelson’s stores in California, said last week that it hired Moelis & Co. to explore options including a sale. Its trailing 12-month operating margin of 7.7 percent is the highest among North American food retailers valued at more than $300 million, data compiled by Bloomberg show.

A representative for Arden said the Compton, California-based company had no update on the status of its review.

Today, Arden shares rose 0.7 percent to $131.06.

Ingles, a $687 million chain with stores in states including Georgia and the Carolinas, also could be an attractive target, said John Drerup, a money manager at Burney Co. in Falls Church, Virginia.

“It would fit very nicely as a bolt-on to someone trying to bolster their strengths in the Southeast,” Drerup, whose firm oversees more than $900 million, including Ingles shares, said in a phone interview. “They are a very well-run company.”

Expanding Reach

Ingles could appeal to operators including Delhaize, which already operates Food Lion stores in the area, or Ahold, the Dutch owner of Stop & Shop outlets in the Northeast, which could use the acquisition to expand further south, said Damian Witkowski, a Rye, New York-based analyst at Gabelli.

Kroger also could be lured to Ingles after the $20 billion chain digests its takeover of Harris Teeter, Witkowski said.

“It would expand their reach in that area,” he said. “Kroger prefers to buy things that don’t need much fixing up and this would fall into that category. They have the balance sheet to do it.”

He estimates Ingles could be valued at $38 a share in a takeover, compared to its closing price yesterday of $28.32. Gamco Investors Inc., the parent company of Gabelli, oversees $40 billion and is the largest outside shareholder in Ingles, according to data compiled by Bloomberg.

Ingles’ attractive valuation and real-estate holdings also could draw interest from private-equity firms, according to Andrew Berkin, co-chief investment officer of Los Angeles-based Vericimetry.

Attractive Pieces

The operator trades at 0.18 times its sales in the past year, a lower multiple than 79 percent of peers, data compiled by Bloomberg show. Ingles owns 69 shopping centers and 95 free-standing stores, according to its annual regulatory filing.

“Ingles looks quite attractive,” Berkin, whose firm’s U.S. small-cap value fund owns shares of Ingles, said in a phone interview. “It’s got pieces that can be sold off to help fund the deal in part because of the value in the real estate.”

Ingles’ Chief Executive Officer Robert P. Ingle II controlled 87 percent of the voting rights as of last September, according to regulatory filings. A deal could be difficult if the family isn’t interested in selling, said Brian Baker, principal at Baker Ellis Asset Management LLC, which oversees about $435 million including Ingles shares.

“They can make an argument that they’ve been doing an excellent job running their business and they want to continue to do so over a long period of time and that’s OK,” Baker, who is based in Portland, Oregon, said in a phone interview.

‘Balanced Approach’

Ron Freeman, Ingles’ chief financial officer, didn’t respond to phone messages seeking comment, while representatives for Cincinnati-based Kroger and Brussels-based Delhaize, declined to comment.

Tim van der Zanden, a spokesman for Amsterdam-based Ahold, said it has a “balanced approach between investing in profitable growth and returning cash to our shareholders,” declining to comment further on individual companies or speculation.

Today, Ingles rose 1.5 percent to $28.75, the highest level since October 2007.

Besides Arden and Ingles, closely held Bi-Lo Holdings LLC also could be attractive to other grocers, according to Carroll of William Blair, which has served as a financial adviser for the southeastern U.S. chain. Canada’s Overwaitea Food Group, another closely held chain, could be another potential target, Perry Caicco, an analyst at CIBC, wrote in a June 12 report.

Todd Lynch, a spokesman for Bi-Lo, said the company doesn’t comment on speculation. A representative for Overwaitea said the company had no comment.

Kroger’s acquisition of Harris Teeter shows how grocery-store operators are motivated to seek deals in the face of competition from large retailers, according to Jeffrey Cohen, a research analyst at IBISWorld.

The industry “is very competitive,” Cohen said in a phone interview. “Grocery stores are basically kind of looking for a way to gain the upper hand.”

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