Albertsons considers merger with Sprouts Farmers Market Inc (NASDAQ: SFM)

Grocery business Albertsons Cos has held preliminary talks to merge with Sprouts Farmers Market Inc(NASDAQ: SFM). Given these speculations, Sprouts Farmers Market stock surged over 20.5% in the last five days alone (as of 11:13AM EDT on March 20th, 2017; Source: Google finance).

Albertsons is backed by private equity firm Cerberus Capital Management, has been in negotiations in recent weeks to take the natural foods grocery private. Albertsons Cos. owns the Albertsons and Safeway chains. Sprouts stock has surged 23.4% to 22.02 in stock market trading last week, which is its best post-IPO debut weekly gain and its second-heaviest weekly volume. Sprouts are among the niche retailers such as Fresh Market Inc and Whole Foods Market Inc, that were facing pressure from Albertsons and Kroger, who now sell some of the same specialty and organic products at lower prices. Fresh Market got acquired by another private equity firm, Apollo Global Management LLC , for about $1.36 billion in cash in 2016.

Moreover, an acquisition of Sprouts would also lead to the consolidation, sweeping the U.S. grocery industry, as regional chains struggle to compete against online retailers such as Inc, big-box stores such as Wal-Mart Stores Inc, and discount chains such as ALDI Inc. Albertsons is one of the two most active industry acquirers along with The Kroger Co. A planned initial public offering for Albertsons’ are delayed since October 2015.

Furthermore, the grocery business is under intense pressure recently. The food price deflation is weighing on natural food chains such as Sprouts and Whole Foods Market (WFM), but also  operators such as Kroger (KR) and discounters such as Dollar General (DG) and Target (TGT). Whole Foods Market, after its latest earnings report, said that it would close a few locations, which the first time it’s done since the recession. On the other hand, Wal-Mart (WMT), the world’s largest retailer, has made a greater effort  Amazon (AMZN) and a slew of upstarts try to upend the business.

Meanwhile, the Representatives for Cerberus and Sprouts didn’t immediately respond to requests for comment outside of normal business hours.

Cerberus had first invested in Albertsons in 2006, then bought another group of stores in 2013 from SuperValu Inc. Albertsons had agreed in 2014 to acquire Safeway Inc. in a deal valued at about $9.2 billion, which was completed the following year. In 2015, Cerberus began its plans to float Boise, Idaho-based Albertsons, which now operates more than 2,200 stores, but delayed the plans amid unfavorable market conditions.

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