Minggu, 06 November 2011

Roll Up Times Two? Sprouts Farmers Market In Talks With Sunflower Farmers Market About Possible Acquisition




The Insider - Heard on the Street

Representatives of Arizona-based Sprouts Farmers Market and Colorado and Arizona-based Sunflower Farmers Market are engaged in discussions about a possible acquisition by Sprouts of Sunflower, which operates 35 farmers market-style grocery stores in eight Western U.S. states, according to my sources.

The talks and negotiations have been going on for slightly over a week, although perhaps longer, according to the information I have.

I stress ... What's going on are discussions of a real and serious nature, but a deal between the two grocery chains has not been reached as of today, according to my sources.

Sprouts and Sunflower operate very similar farmers market-style format grocery stores.

Both privately-held chains focus on offering value-priced natural and organic food, grocery (across all store categories) and related products in their respective stores, which also are about the same size, averaging about 28,000 to 33,000 square feet. Both chains also use fresh produce as a key proposition, building their store formats and product offerings, which are nearly identical, around large produce departments designed to look like an indoor farmers market.

It was just 10 months ago when I first reported (here) that representatives of Arizona-based Sprouts Farmers Markets and then Irvine, California-based Henry's Farmers Markets were engaged in talks involving an acquisition/merger deal between the two farmers market-style grocery chains, which share a common family tree.

In a series of follow-up columns - and in various news stories by Fresh & Easy Buzz published in January and February, we further reported and developed the story, adding new information about the deal talks between private equity firm Apollo Global Management which owned Henry's through its Southern California-based Smart & Final LLC retail company and is now the majority-owner of Sprouts, and Sprouts Farmers Market.

On February 15 of this year Smart & Final announced an agreement to sell Henry's Farmers Market to Sprouts, in a deal that would make the owner of Smart & Final and Henry's the majority-owner of Sprouts.

According to my sources, Apollo Global Management owns slightly more than 50% of Sprouts Farmers Market. The rest of the food and grocery retailing company, which currently operates 106 stores in four Western U.S. states, is owned by members of the Boney family (the founding family of what became Henry's Farmers Market) - Stan Boney is chairman and his son Shon is CEO - who founded Sprouts, two other co-founders, Scott Wing and Kevin Easler who also serve on the board, and nearly 200 investors, ranging from a few who own a good-sized stake in the grocer, to the majority who own small shares. The various investors existed prior to the Henry's Farmers Market deal with Apollo.

In my April 15 column I reported that the deal between the two parties would be final on April 18. [April 15, 2011: Sprouts Farmers Market's Acquisition-Merger of Henry's Farmers Market to Be Final On Monday, April 18.]  Also see: January 24, 2011: 'The Insider' - End-Game Could Be Near in the Sprouts Farmers Market-Henry's Farmers Market Deal Talks.

On April 18, 2001, Sprouts Farmers Market confirmed the deal was final in an announcement. [April 18, 2011: Sprouts Farmers Market Confirms Our April 14 Scoop: Sprouts' Acquisition-Merger of Henry's Farmers Market Final Today.] At that point the mainstream business and grocery industry trade press all wrote stories about the deal, although a couple publications picked up the reporting in Fresh & Easy Buzz prior to the April 18 public announcement by Sprouts and Apollo Global Management.

Sunflower Farmers Market was founded in 2002 by Michael Gilliland and some partners.

Gilliland is the former co-founder and CEO of Wild Oats Markets, Inc., which was acquired in 2007 by Whole Foods Market. Gilliland had left Wild Oats and started Sunflower Farmers Market before the Whole Foods acquisition of Boulder, Colorado-based Wild Oats, which at the time was the Austin, Texas-based chain's main competitor in the the natural-organic food and grocery retailing space.

He served as CEO and was the public and media face of Sunflower Farmers Market until February of this year, when he resigned that position and his seat on the board after being arrested in Phoenix, Arizona and charged with solicitation of a minor prostitute for the purpose of sex.

Gilliland has plead innocent to the charges. He was originally supposed to go to trial in Maricopa County Superior Court (Arizona) on August  9. However, he has requested and received three continuances from the court since then, for trial dates set for September, then October and now November 14, which is his current trial date.

The reason Gilliland and his attorney have given the court for the continuances, according to court documents I've seen, is that the co-founder and former CEO of Sunflower Farmers Market, who still owns shares in the chain, has been traveling out of state. He has a pre-trial conference set for tomorrow (November 7), in advance of his scheduled November 14 trial in Arizona.

Sunflower Farmers Market, which although it maintains its corporate headquarters in Boulder, Colorado where the chain was founded also has an operations-oriented headquarters facility in Phoenix, Arizona where Sprouts is headquartered, hasn't let the controversy surrounding Gilliland's arrest and resignation prevent it from carrying on its operations and rapid growth strategy, which has been in place for a few years.

Immediately following Gilliland's resignation as CEO and from the board on February 10, 2011 - which was two days after his arrest - Sunflower's board began distancing the grocery chain from Gilliland. Two days later on February 12, Sunflower's board, which is headed by Bennett Bartoli, named then-president Chris Sherrell acting CEO. In late April the board made Sherrell permanent CEO of Sunflower Farmers Market.

Along with naming Sherrell as acting CEO on February 12, Bartoli and the board said in a statement that Gilliland would no longer have any involvement with the chain he co-founded and up until his arrest has been the public face of.

The board also said in the announcement that Gilliland and the board said in a statement that Gilliland would no longer have any involvement with the chain he co-founded and up until his arrest has been the public face of. The board also said in the announcement that Gilliland was now a  "minor investor" in Sunflower Farmers Market. All past articles featuring Gilliland - and there were many - posted on the Sunflower Farmers Market website, for example, were removed the day he resigned, as part of disassociating him from the chain and its image.

Since Gilliland's resignation and Sherrel's taking over as CEO in February, Sunflower Farmers Market has launched into two new market regions, opening two stores in Northern California and one unit in metro Tulsa, Oklahoma.

Sunflower opened its first store in Northern California, which was also its first unit in the Golden State, in Roseville near Sacramento on May 11. The second Sunflower market opened last month in Modesto, California. Modesto is in the Northern Central Valley, about 100 miles from Sacramento.

The farmers market-style format grocery chain so far plans to open four additional stores in Northern California next year (in spring and summer) - one unit in Sacramento, two stores in San Jose, and one unit in nearby Mountain View. It's been looking for additional store locations in Northern California as well, with a focus on the San Francisco Bay Area and metro Sacramento regions.

On August 21 Sunflower Farmers Market opened its first store in Oklahoma. That store is in Oklahoma City.

Oklahoma City has recently become ground zero for natural-organic food retailing chains. For example, in July the Natural Grocers' chain opened a store in Oklahoma City. And on October 12 Whole Foods Market opened a store there. The new 35,000 square-foot Whole Foods market is about a mile from the about 28,000 square-foot Sunflower market opened in August.

Sunflower currently has a second store scheduled to open in Oklahoma in early 2012. That unit is in Edmond.

With the addition of stores in California (all currently in and planned for the northern part of the state) and Oklahoma this year, Sunflower Farmers Market now operates 35 stores in eight states in the Western U.S. - Colorado (12), Arizona (7), New Mexico (6), Nevada (2), Texas(2), Oklahoma (1), Utah (3) and California (2).

The grocer also currently has a few planned new stores in the pipeline in its existing market regions. For example, Sunflower announced in late October that its planning a 28,000 square-foot store in the Rimrock Crossing Shopping Center in Grand Junction, Colorado.

Sunflower already has plans to open its thirteenth store in its home state next year. That store, at East Colfax Avenue and Garfield Street in the Denver area, is currently set for a late 2012 opening, CEO Chris Sherrell said in the October press release.

I also know from my sources that in addition to searching for numerous future locations in Northern California, as I've noted, Sunflower also has been looking for more additional store sites in all eight states but most particularly and aggressively in Oklahoma and Utah, along with Northern California.

Until fairly recently Sunflower was focusing on searching for numerous new locations in Texas, where Sprouts has been opening and has added numerous stores with the acquisition of Henry's Sun harvest markets in the state, which were part of the deal this year.  But more recently Sunflower has switched that focus and emphasis to next door Oklahoma.

Sprouts Farmers Market currently has 106 farmers market style grocery stores in four western states - Colorado, Arizona, California and Texas.

Assuming the price was right, An acquisition of Sunflower Farmers Market would be fairly positive from synergistic standpoint  for Sprouts and Apollo, which as I've said in my previous columns earlier this year wants to grow the chain rapidly.

For example, Sprouts has no presence in four of the Western U.S. states where Sunflower has its 35 stores - New Mexico, Utah, Nevada and Oklahoma.

While Sprouts could enter these states fairly rapidly if it wanted to because its decentralized distribution system makes doing so easier than for a self-distributing chain - Sprouts uses a natural-organic foods wholesaler to distribute the majority of products to its stores - an acquisition of Sunflower would obviously make that entry immediate, giving it six stores in New Mexico, three units in Utah, two stores in Nevada and one unit plus more on the way in Oklahoma.

Acquiring such an existing store base makes it easier for a grocer to locate and open additional stores at a faster pace then entering from scratch does.

It also immediately adds sales to the bottom line.

Another plus for Sprouts is that Sunflower has no stores in Southern California, where the majority of its stores now are because of the Henry's acquisition. Therefore, there would be no duplication in Southern California, a key market for Sprouts, with an acquisition of Sunflower Farmers Market, and therefore no need to close any existing stores.

Another plus is Northern California, where both Sunflower and Sprouts are expanding rapidly. Sprouts currently has four stores in the region - one each in El Grove and Roseville near Sacramento, and two in the San Francisco Bay Area, in Sunnyvale (South Bay area) and Dublin, which is in the East Bay Area.

So far Sprouts Farmers Market has two stores set to open in the region next year. Those stores are in Walnut Creek, which isn't far from Dublin in the East Bay Area, and Citrus Heights, which is in the Sacramento metro area, just like El Grove and Roseville are.

Sprouts is also currently in the approval process with the city for a store in Santa Rosa, which is in the North Bay Area. Additionally, the farmers market format grocer is looking for numerous additional store locations in Northern California.

The four stores Sunflower Farmers Market plans to open next year in Northern California are all potentially good fits - and locations - for Sprouts. The two units in San Jose and the one store in Mountain view are near the existing Sprouts market in Sunnyvale, for example, and Sprouts Farmers Market currently doesn't have stores in any of the two cities.

Further, the two stores Sunflower Farmers Market plans to open in Sacramento next year fit into Sprouts' focus on the Sacramento metro region. At present it has no stores set to open in 2012 in Sacramento proper. The two planned Sunflower units would give it two such stores. Citrus Heights, where Sprouts will open a store in early-to-mid-2012, is right next door to Sacramento, and Elk Grove and Roseville, where Sprouts and Sunflower both have existing stores, are nearby.

The Sunflower store in Roseville is far enough geographically from the Sprouts unit that I think Sprouts Farmers Market could probably keep it in operation, were an acquisition to become reality. It could even operate it under the Sunflower name, which might not be a bad idea if it were to keep it open.

Regarding Colorado and Arizona, Sprouts' top two states in terms of store-count along with California - which also are where Sunflower Farmers Market has 19 of its 35 stores (12 in Colorado with 2 more planned, and 7 in Arizona - there is some location duplication but it's actual fairly limited, according to my analysis.

A few Sunflower Farmers Market units in each state may need to be closed. Some of the stores might also be able to be operated under the Sunflower banner, although I think Sprouts would eliminate it like they've done with the Henry's banner. But the minimal duplication is manageable as I see it - and far from a deal stopper.

Earlier this year Sprouts' said the acquisition-merger with Henry's would create a food and grocery retailing company with about $1-$1.2 billion in annual sales. I estimate, adding in new stores opened since the deal was finalized, along with those units planned for the first half of 2012, that Sprouts Farmers Market is on-track to have about $1.5 billion in annual sales soon.

Sunflower Farmers Market has annual sales of about $600-$650 million, based on information I've obtained from sources at the retailer over the last year.

Therefore, were a deal to be done between Sprouts and Sunflower - and I stress the two parties are only talking at this point - I estimate it would make Sprouts Farmers Market a grocery chain with about $2 million in annual sales, which is more than double Sprouts' annual sales before the Henry's deal happened this year.

What I know is that Apollo Global Management has the capital available to do a deal.

I also know it wants to grow Sprouts rapidly. Acquisitions make such rapid growth happen much faster than an organic growth-only approach does.

Sunflower Farmers Market is also in a state of flux, with the resignation of Gilliland, which is something it's managed well. The post-Gilliland Sunflower is open more to change than the chain was while he was still CEO, for example.

It also has investors in the company who when they made the investments a few years ago were then looking at an about five-year time horizon to get some pay back.

Sunflower is also growing rapidly, which takes a lot of cash - new stores, new employees, ect. Some of that growth can come out of cash flow and previous loans and investments. But the rapid new store growth plan Sunflower Farmers Market is following is also going to take new money, in my analysis and opinion.

So, based on what I've laid out above, the stage is set rather well - synergies, cash available, common needs - for an acquisition of Sunflower by Sprouts Farmers Market. But of course, the Devil is always in the details.

Most important, the farmers market style formats are near-identical, as was the case between Henry's and Sprouts. Apollo wouldn't have likely done a roll up of Henry's with Sprouts were the formats not virtually the same.

As such, a second roll up, this time of Sunflower, is the next logical step for Apollo/Sprouts.

It also eliminates the only remaining significant farmers market-style format competitor.

Many operators and investors attach significant value to this element alone when considering a deal. For example, a considerable amount of the motivation behind Whole Foods Market's acquiring Wild Oats in 2007, which was performing poorly but was its leading competitor in terms of directly related formats, was to remove it as a competitor, which is something co-founder and co-CEO John Mackey has stated publicly.

As of today what's going on between the representatives of Sprouts and Sunflower, who all know each other, particularly at the board and senior executive levels, is a real and serious discussion of a possible acquisition of the latter by the former. Executives at neither chain are confirming it, which is wise and as you would expect to be the case.

Stay tuned. I may have more soon.

- 'The Insider'

[Readers: Click here to read all past columns by 'The Insider' about the Sprouts'-Henry's deal. Also, click the following links -  and  - for related stories about Sprouts Farmers Market and Sunflower Farmers Market.]

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