Sunday, January 30, 2011

The Sprouts & Henry's Deal Talks: Smart & Final is Looking Like A Retailer That Wants to Make A Deal

The Insider - Heard on the Street

It's been over three weeks since I broke the story that representatives of Phoenix, Arizona-based Sprouts Farmers Market and City of Commerce, California-based Smart & Final were having discussions about a possible acquisition of Irvine, California-based Henry's Farmers Market by Sprouts. See my January 5, 2011 column: Will 2011 See Sprouts Farmers Market Acquiring Henry's Farmers Market? 'The Insider' Says it Could Be in The Cards

Smart & Final, which is owned by private equity firm Apollo Global Management, owns Henry's Farmers Market. Sprouts Farmers Market is privately-held.

The 25 days hence doesn't mean the discussions have ended though. To the contrary, talks between the Sprouts Farmers Market and Apollo Global Management/Smart & Final representatives are set to continue.

But even more interesting, I can tell you this: Smart & Final and its private equity firm owner want to sell the Henry's Farmers Market chain, even if a deal with Sprouts doesn't come to fruition. This strong desire to sell Henry's is also a key reason why the acquisition/merger talks are continuing.

Sprouts Farmers Market is the closest bird-in-the-hand buyer Smart & Final has. But if the bird (Sprouts) decides not to build its nest in the hand (Henry's), It's my analysis Smart & Final will shop Henry's Farmers Market around, searching for another buyer.

Why? Because Smart & Final wants and needs to unload Henry's in order to get an infusion of needed cash, after losing what Fresh & Easy Buzz reported in November and December 2010 to be at least $40-$50 million, on its SmartCo Foods venture in Denver. [See - December 11, 2010: Smart & Final's Not So Marvelous SmartCo Foods' Misadventure in Denver; November 17, 2010Smart & Final Pulls the Plug On All Five SmartCo Foods Stores in Metro Denver After Being Open Less Than Five Months

Some recent behavior by Smart & Final/Henry's lends a bit of observational or empirical evidence to what my sources tell me and what I offer in my analysis above.

First, in my January 5 column I reported Smart & Final/Henry's pulled out of signing a lease for a store in Boise Idaho, which would have been its first in the state, at the last minute, in late December 2010, surprising the building's owner, as well as members of the Boise City Council. Smart & Final/Henry's was high on locating the store at the site in Boise, until the plug was pulled on SmartCo Foods in November 2010.

Most recently, Smart & Final/Henry's decided against signing a deal it had in principal with John DiNapoli and his JP DiNapoli Cos. Inc. commercial real estate company, which earlier this month bought Cosentino's Market, at 2666 South Bascom Avenue in San Jose, California, and land around the store from the Cosentino brothers, for $10 million. Members of the Cosentino family have operated grocery stores in the San Francisco Bay Area for over eight decades, along with acquiring real estate, like the land they owned around the South Bascom store. [Read - January 17, 2011
First Look at the Willow Glen-San Jose Fresh & Easy Neighborhood Market Store Set to Open March 2, 2011 - for more details about the Cosentino's.]

Developer DiNapoli's plan called for demolishing the existing Cosentino's store building and then constructing a new building on the same site, which would house a Henry's Farmers Market store. The Henry's store would serve as the food and grocery retail anchor of what would then become a shopping center developed by DiNapoli on the surrounding land he bought from the Cosentino's along with the market. The target was to have the Henry's and some related stores opened in 2012.

But the developer and owner of the properties has found a new, local grocer to go into the Cosentino's store and to serve as the food and grocery retail anchor for his development. The local grocer is Lunardi's Markets, which like Cosentino's has a long history (57-years) in San Francisco Bay Area food retailing. The founders of both Cosentino's and Lunardi's were immigrants from Italy.

Instead of tearing down the building, Lunardi's is going to move into it - and soon. Cosentino's is closing on February 26, 2011. According the the developer, Lunardi's plans to move in just a few days to a week after the Cosentino brothers close the store.

Lunardi's Markets, which is headquartered in San Bruno just a few miles down the peninsula from San Francisco, operates seven supermarkets in the Bay Area. The soon to be vacated Cosentino's supermarket at Union & Bascom in San Jose will become store number eight for the family-owned, independent grocer. Lunardi's has an existing store at 4650 Meridiam (at Branham) in San Jose, not far from the 2666 South Bascom Cosentino's store.

The reason this decision by Smart & Final/Henry's to not go forward with the store is significant is because prior to November 2010, when Apollo Global Management/Smart & Final pulled the plug on its less than five month old SmartCo Foods venture in metro Denver, Colorado, Henry's was going full-bore into grabbing store locations in Northern California, focusing on the Sacramento region and the Bay area. Henry's Farmers Market opened its first store in Elk Grove, near Sacramento, in the summer of 2010.

However, Smart & Final/Henry's has now put the breaks on all that activity; so much so that it's obvious to a close observer that the behavior is related to the acquisition talks with Sprouts Farmers Market.

For example, in addition to the above examples, Smart & Final/Henry's recently put the breaks on its plans to open a store in Walnut Creek, California, in the East Bay Area. Just a few months ago the retailer was attempting to fast-track the approval of the store through the Walnut Creek City Council. Now, according to a source with the City of Walnut Creek, little has been heard recently about Henry's plans to open the store in the city.

Further in this regard, commercial real estate sources who previously provided us with information about the various cities and neighborhoods in Northern California where Henry's was looking at and signing leases for stores in Northern California, told me recently the grocer's search has for all practical purposes been put on hold. This tracks with similar information I have from a source in a position to know the day-to-day plans at Henry's in terms of its new store location search strategies.

Lastly, the grocer recently took down a list of coming new stores from the Henry's Farmers Market website. Looking at this behavior in conjunction with what I've described above helps make my point, which is that all is at hold at Henry's because Apollo Global Management/Smart & Final have one thing in mind - selling the chain.

My bottom line: The talks between representatives of both farmers market-style food-grocery chains continue. But if a deal can't be done to sell Henry's Farmers Market to Sprouts Farmers Market, or to merge the two chains in a way that puts at least a substantial amount of cash in Smart & Final's hands, Apollo Global Management/Smart & Final will shop Henry's around, hoping it can find a buyer. Is there another buyer. That's hard to say. But I can say without a doubt I don't see another buyer out their that has the same high level of synergies with Henry's Farmers Market that Sprouts does.

Therefore, the talks between Sprouts and Smart & Final/Henry's continue. Or to quote that famous deal-maker of the baseball diamond, Yogi Berra: " It ain't over till it's over." And it isn't over between Sprouts and Henry's - yet.

- 'The Insider'

[Editor's Note: 'The Insider' column appears regularly in Fresh & Easy Buzz. The opinions in the columns are those of 'The Insider,' and not necessarily shared by Fresh & Easy Buzz. Below are links to 'The Insider's' first column of 2011, and to a selection of 2010 columns, published in Fresh & Easy Buzz.]

The Sprouts and Henry's deal talks: Follow the story at the links below

January 5, 2011: 'The Insider' - Will 2011 See Sprouts Farmers Market Acquiring Henry's Farmers Market? 'The Insider' Says it Could Be in The Cards

January 7, 2011: 'The Insider' - Sprouts Farmers Market-Henry's Farmers Market Deal Negotiations Continue; End-Game Could Be Near

January 8, 2011: Smart & Final-Henry's Tell Employees About Deal Discussions With Sprouts Farmers Market; Confirming 'The Insider's' Reports

January 10, 2011: Sprouts Farmers Market to Open Second Northern California Store in Roseville No Later Than Mid-April

January 11, 2011: 'The Insider' - A 'New York State of Mind': 'The Insider' On Walmart, Apollo Global Management, Tesco's Fresh & Easy and the NRF in New York City

January 24, 2011: 'The Insider' - End-Game Could Be Near in the Sprouts Farmers Market-Henry's Farmers Market Deal Talks

December 11, 2010: Smart & Final's Not So Marvelous SmartCo Foods' Misadventure in Denver

November 17, 2010: Smart & Final Pulls the Plug On All Five SmartCo Foods Stores in Metro Denver After Being Open Less Than Five Months

1 comment:

Anonymous said...

From what I see S&F has lost market share to Jetro Rest Dep and it will only get worse. So they buy Henry to get into another area of food retail and have never know how to run it much like Wild Oats did. S&F needed a cash cow but with the losses at their brands are in need of cash now. I can see Applo dumping S&F as well but they should fire the execs at S&F first to set a example and increase the value of the company