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Fresh Market shares jump after report Kroger could buy chain

February 11, 2016

The Fresh Market Inc., which said in October that it was considering a sale of the company, rose 22 percent on a report that Kroger Co. wants to acquire the supermarket chain.

Kroger is in the second round of an auction for Fresh Market, according to Reuters, which cited unidentified people familiar with the situation. Other companies, including private equity firms Apollo Global Management LLC, KKR & Co. and TPG Capital, are part of the auction, the news service reported.

Shares of Fresh Market climbed to $22.68 on Thursday in the wake of the report, marking the biggest increase since November 2010. Before the rally, the stock had declined 21 percent this year.

Kroger, the largest grocery chain in the U.S., declined to comment to Bloomberg News about the report. Fresh Market also declined to comment.

Fresh Market has stores at 2490 East 146th St. in Carmel, 9774 East 116th St. in Fishers and 5415 N. College Ave. in Indianapolis. Kroger has dozens of stores throughout central Indiana.

The possible acquisition is not a complete surprise. Fresh Market has been trying to get someone to save it for months now, and Kroger has been on an aggressive acquisition spree.

So-called natural food chains proliferated over the past decade as consumers shifted to healthier fare, but lately have lost their hold on what has become an over-saturated market.

Back when Whole Foods opened in 1980, there were fewer places to shop for specialty items such as local beefsteak tomatoes and organic Fuji apples. Even as late as 2007, when Whole Foods pursued rival Wild Oats, Walmart and Kroger were not considered true competitors.

But while traditional grocery stores went bankrupt and consolidated, specialty grocery chains such as Sprouts, Fairway, Fresh Market and Trader Joe's were collectively building hundreds of stores. Eventually, surviving traditional grocers such as Kroger caught up and began stocking the same stuff—often at cheaper prices.

Now, those specialty chains are going the same way as traditional grocers.

Meanwhile, after sitting out of major deal-making for 15 years, Kroger has been filling its cart. First, there was the $2.5 billion purchase of Southeastern grocery chain Harris Teeter in 2014, followed by the $280 million takeover of Vitacost.com, an online purveyor of vitamins and health food. Late last year, America's largest grocer spent $800 million to acquire Roundy's, a small-fry chain that operates Pick 'n Save and Mariano's.

The acquisitions have left Kroger with a sizable amount of debt. It had about $11 billion in borrowings at the beginning of November and issued another $1.1 billion to help pay for Roundy's. That's not a big deal for now (Kroger is still rated investment grade by ratings agencies Moody's and Standard & Poor's), but eventually its debt-fueled buying binge could slow.

Kroger shareholders don't seem overly concerned. The stock slipped on the news, but only by about 1 percent. With a market value of about $1 billion, Fresh Market won't break the bank. The valuation also falls in the sweet spot for Kroger. It has paid a median of 0.6 times revenue for its biggest takeover targets. After Thursday's jump, Fresh Market is valued at just that.

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