PHOENIX — The pending merger of Sprouts Farmers Market here with Henry's Farmers Market could create a powerful regional chain with potential national implications, industry observers told SN last week.
Sprouts operates 55 stores in Arizona, California, Colorado and Texas with sales estimated at $550 million; Henry's, a subsidiary of Smart & Final, Los Angeles, operates 43 stores in California and Texas. The combined operations — which will all ultimately operate under the Sprouts banner — will have sales exceeding $1 billion, Sprouts officials said last week.
Under terms of the deal, Apollo Management, the New York-based investment firm that owns Smart & Final, will sell Henry's to Sprouts for an undisclosed amount and become the majority owner of Sprouts. The sale is expected to close before the end of March.
“This is a very good strategic move in an industry where size matters,” Scott Van Winkle, an analyst with Cannacord Genuity, Boston, told SN. “Because the two companies operate stores that are very similar, the combination will create a much healthier concept and a stronger regional operation.
“Both concepts are value oriented, which goes hand-in-hand with the farmers' market concept, and it would not surprise me if this deal doesn't create industry speculation about a potential combination down the line of Sprouts in the West with Fresh Market [based in Greensboro, N.C.] in the East.
“But whether or not the concept goes national will not be the driver of success, because there is plenty of opportunity for Sprouts to be a major player in its own region by restricting expansion to areas west of the Mississippi River.”
Van Winkle said it will probably take 24 months or so for the two companies “to bolt the operations together, after which we could see Sprouts going public, just as Fresh Market has done.”
With both companies already being supplied by United Natural Foods Inc., the merger would give the expanded company greater purchasing power “and the ability to deliver more value to consumers, which is why size matters,” Van Winkle added.
Andrew Wolf, managing director of BB&T Capital Markets, Richmond, Va., also said he believes the combination of the two companies should improve Sprouts' purchasing power.
He also said he sees plenty of expansion opportunities. “When you look at the growth rate of Whole Foods, Trader Joe's and Fresh Market, it's clear that fresh and natural is definitely a growth industry, so it would make sense for Apollo to put capital into Sprouts' expansion,” Wolf pointed out.
“With both Sprouts and Henry's focused more on the value side than the high-priced side, it positions the combined operation well for growth. It's just a matter of finding enough people to manage new stores and make that growth possible, so expanding beyond the Southwest into another region might be a big leap.
“My suggestion would be for Sprouts to grow in a very rational manner.”
Wolf said he does not see a better-financed Sprouts as a potential threat to Whole Foods Market, Austin, Texas, “because their concepts are so different. But I think Sprouts and Whole Foods can co-exist because the market is growing so rapidly.”
Ironically, both Sprouts and Henry's were originally founded by the same family — the Boneys of San Diego.
It was Stan and Steve Boney, the sons of veteran retailer Henry Boney, who opened a group of stores in 1969 that changed the name of its California stores to Henry's Marketplace in 1997 while acquiring Sun Harvest stores in Texas and retaining that name.
The Boneys sold Henry's and Sun Harvest to Wild Oats in 1999, and after Wild Oats was sold to Whole Foods in 2007, Whole Foods sold the 34 Henry's and nine Sun Harvest stores to Smart & Final.
In 2002, Stan Boney and his son, Shon, began opening Sprouts Farmers Markets.
According to Stan Boney, chairman of Sprouts, “The combination of Sprouts and Henry's is an exciting chapter in our family's lives, and we look forward to continuing to deliver on our mission of helping America eat healthier, live longer and spend less.
“Apollo is one of the most experienced and successful private equity firms in the nation, and we are excited about their support for our business model.”
Andrew S. Jhawar, a senior partner at Apollo and co-head of its consumer and retail industry group, said the investor is excited about “help[ing] reunite these two great companies under the Boney family's leadership.
“After the combination, Sprouts will be one of the largest, growth-oriented specialty retailers in the U.S. with a focus on natural and organic products. Apollo looks forward to supporting the management team's vision for significant future new-store growth across the country.”
Dave Hirz, president of Smart & Final, said the pending sale of Henry's “provides [us] with a healthy financial return on our 3½-year investment in [those] stores.”
Hirz said Smart & Final will use cash from the deal to pay down debt to strengthen what “is an already strong balance sheet.”
A company spokesman declined comment on reports Smart & Final may use some of the funds from the sale of Henry's to acquire a Hispanic chain in Southern California.
Excluding the Henry's and Sun Harvest stores, Smart & Final operates 247 non-membership warehouse stores in California, Oregon, Washington, Arizona, Nevada, Idaho and northern Mexico.