March saw rumours of what called be a significant piece of M&A in the US grocery retail sector, one deal done in the Middle East e-commerce market and one major retail CEO standing by his plans to add to his business through acquisition. Dean Best reports.
Could US major Albertsons swoop for organic grocer Sprouts?
Mid-March saw Bloomberg report Albertsons – the national US retailer behind grocery chains like Safeway and Vons, as well as its namesake division – had held initial talks to buy natural and organic food retailer Sprouts Farmers Markets.
Go deeper with GlobalData
Citing unnamed “people with knowledge of the matter”, discussions were at an early stage. Neither company has made any public comment.
Arizona-based Sprouts has around 250 stores in 15 US states and is one of a number of natural and organic chains that have risen in recent years and ridden the wave of growing consumer interest in those categories.
However, in broad terms, retailers like Sprouts and even larger peer Whole Foods Market have seen sales come under some pressure as bigger conventional grocers like Wal-Mart and Kroger have expanded their own natural and organic ranges.
Sprouts still saw top-line growth in its most recent financial year, which ran to 1 January. Net sales were up 13%, although the bulk of that was due to new store openings. Comparable-store sales growth was 2.7%. Nevertheless, Sprouts pointed out its results came “in a year significantly impacted by deflationary pressures”.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataTo repeat, no deal has been announced. But the rationale for both businesses seems solid. Sprouts gets to benefit from the scale and buying power of Albertsons, while the private equity-backed giant boosts its presence in some of the faster-growing parts of the US food market.
Albertsons’ backers, Cerberus, may also have an eye on improving the growth profile of the wider business ahead of any plans to list it.
Will there, however, be rival interest? One to watch.
Amazon makes bet on Middle East with Souq.com acquisition
It’s not often Amazon makes what it appears to be a sizeable acquisition but, in late March, the e-commerce titan seemed to have done just that, with the announcement of the purchase of Dubai-based e-retailer Souq.com.
Terms were not disclosed but Emaar Malls, a Dubai-based shopping mall operator, had already been reported by Bloomberg to have made an US$800m bid for Souq.com, which was set up in 2005 and has become known in some quarters as the Amazon of the Middle East. A report in The Wall Street Journal on 28 March, the day the deal was announced, quoted an unnamed banker saying Amazon and Souq.com had agreed on a price tag of around $700m.
The online retail market in the Middle East is small but it is growing rapidly and Amazon appears to believe the most effective way for it to build a significant presence in the region is via M&A.
Souq.com sells the full range of consumer goods, including food and beverage. Data issued by Amazon when it announced the deal said Souq.com sold 8.4m products across 31 categories, attracting 45m visits a month.
“Souq.com pioneered e-commerce in the Middle East, creating a great shopping experience for their customers. We’re looking forward to both learning from and supporting them with Amazon technology and global resources,” Russ Grandinetti, senior vice president for Amazon’s international consumer operations, said.
Ronaldo Mouchawar, the CEO and co-founder of Souq.com, said: “By becoming part of the Amazon family, we’ll be able to vastly expand our delivery capabilities and customer selection much faster.”
If the reports on the price tag are accurate, it appears Amazon may have secured the business for a less than had been speculated last November. At the time, Bloomberg suggested the companies were in talks over a transaction that would have valued Souq.com at $1bn.
Amazon no doubt would have been attracted to Souq.com’s position and infrastructure in a region with a young and growing population and, in some parts, rapidly-rising incomes.
As with any growing sector, Amazon and Souq will face intense competition from other local players. However, Souq appears to have a built a significant presence and is a business Amazon has been prepared to move for, expanding in the Middle East in an inorganic way, a different path to some of its other international forays.
Tesco stands firm on Booker deal
Tesco stunned the market in January when it announced it had struck a deal to buy UK wholesaler Booker.
The acquisition – if approved by competition officials – would extend Tesco’s reach into the UK business-to-business sector, providing it with a foothold as a supplier to the growing foodservice channel, as well as establishing it as a supplier to smaller retailers.
Nevertheless, Tesco is itself already a major player in the UK convenience retail market, while the Booker business includes symbol-based, c-store chains including like Premier, Londis and Budgens. Regulators will be looking at the transaction closely.
Booker does not own the stores but sells them a hefty chunk of their stock and provides services such as IT and marketing. Tesco believes regulators will pass the deal because Booker does not own those convenience stores. However, Booker’s relationship with those symbol groups and the wholesaler’s position as a supplier to thousands of independents will mean regulators will scrutinise the deal and any possible impact it could have on competition.
Despite Tesco’s confidence the deal will get the green light, there will likely be some anxiety about getting it through. And last month the planned transaction hit the headlines again due to the emergence of some opposition towards the purchase among Tesco’s investors.
Fund manager Schroders reportedly wrote to Tesco’s chairman to urge the deal to be called off, claiming it will destroy value for shareholders. Meanwhile, investment management firm Artisan Partners said the Booker deal was a “distraction” from Tesco’s core task, which, to its mind, is completing the recovery of its core, UK retail operations. The two shareholders own a combined 9% of Tesco.
Dave Lewis, Tesco’s CEO, was having none of it. “We obviously see our position differently. We see the growth opportunity that coming together with Booker represents,” he said. “We have identified synergies that are significantly ahead of the earnings of Booker to-date, so we are completely committed to the deal, absolutely, completely committed to the deal.”
Bruno Monteyne, an equity analyst covering Tesco for investment bank Sanford Bernstein, argues the “economic rationale for the deal is extremely strong”. He said last month: “The majority of shareholders we talk to support current CEO Dave Lewis and this deal.”
Lewis was talking to reporters after Tesco announced a deal with the UK’s Serious Fraud Office over its 2014 accounting scandal. The UK’s largest retailer agreed to pay a fine of GBP129m to avoid prosecution.
