Apollo's Edge in the Fresh Market Auction

The buyout lets the founding family retain its stake, enabling Apollo to secure financing in a tough market.

The auction for gourmet grocer Fresh Market is over and one private equity firm is left standing in the checkout aisle.

Fresh Market's shares soared 24 percent Monday after Apollo Global Management, arguably the most active private equity firm so far this year, said the company accepted a buyout offer valuing it at $1.4 billion. Sure, there's a 21 day "go-shop" period during which another suitor could emerge, but that's unlikely since a seemingly thorough sale process was run. 

Notably, Kroger's shares shed as much as 1.7 percent in early trading, reflecting mild investor disappointment that the supermarket chain didn't triumph over financial bidders. Strategic buyers like Kroger can justify paying more because they're better able to extract cost savings, so it's unusual for them to be outmaneuvered by buyout shops. In this case, the latter had an edge.

Checking Out

The grocery chain has agreed to be acquired by Apollo for a 53% premium to its recent lows.

Source: Bloomberg

Bloomberg News reported in October that Fresh Market's founder and board chairman Ray Berry was considering taking the company private and had turned to Apollo for help.  While a deal with Kroger could have included Kroger's own shares as a form of payment, Fresh Market would account for less than 4 percent of the larger company's earnings. That means even if the acquisition paid off, there's a chance it might not have done much for Kroger's stock price. 

Berry and his son own roughly 9.8 percent of Fresh Market and likely had a preference for a deal that would let them maintain an equity stake in order to directly benefit if the company flourished under a new owner's control. The chance to invest alongside Apollo, which made more than 10 times its investment in Sprouts Farmers Markets and 2.8 times its investment in Smart & Final, surely would have appealed. 

For Apollo, the Berry family's interest in rolling its stake (valued at about $133 million) helped plug a financing gap at a time that has been tricky for buyouts, and resulted in a transaction involving less debt. That may have made banks more willing to commit, since less leverage is a feature favored by the eventual holders of the notes backing the buyout. 

The deal also is a win of sorts for Fresh Market's other shareholders, who will now be able to regain some lost ground after witnessing the stock's 45 percent decline over the past 12 months. The transaction values the North Carolina-based grocer at around 7 times its fiscal 2016 earnings before interest, taxes, depreciation and amortization, which is in line with the multiples paid by Kroger for Roundy's and Harris Teeter Supermarkets in transactions that closed in December 2015 and January 2014, respectively.

Supermarket Sweep

The gourmet grocery chain has been battling declining sales growth.

Source: Bloomberg Intelligence

Fresh Market is no Sprouts, and competition is fiercer now than before, but Apollo said it sees opportunities to enhance the "brand, merchandise offering and price-value combination." While such a recipe doesn't guarantee success, an improved product mix and lower prices may help to bring in repeat customers, which is a start.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Gillian Tan in New York at gtan129@bloomberg.net

    To contact the editor responsible for this story:
    Beth Williams at bewilliams@bloomberg.net

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