Potential Brookshire deal draws industry interest

Brookshire Grocery’s recent acknowledgement that it was exploring strategic alternatives including a possible sale could draw interest from a variety of strategic players ranging from distributors to competing retail banners, industry sources said.

The family-owned company, which runs 152 stores under the Brookshire’s, Fresh by Brookshire and Super 1 banners in Southeast Texas, Arkansas and Louisiana, acknowledged it was seeking a potential deal in a memo issued to employees. The note cautioned that the review may not result in a deal. “It is our goal to preserve and strengthen the Brookshire Grocery business and heritage,” according to the memo, which was published by the Tyler Morning Telegraph newspaper in Brookshire’s Tyler, Texas, hometown.

Brookshire's reopened this remodeled Chandler, Texas, store in July.

Although early speculation has centered on strategic retail acquirers like Kroger, Albertsons and H-E-B, the field is also likely to include wholesalers seeking additional volume for their customers, according to Burt P. Flickinger III, managing director of Strategic Resource Group, told SN.

“There would be quite a lot of people on the list,” Flickinger said, noting that he’d expect Associated Wholesale Grocers, Affiliated Foods Midwest, Affiliated of Amarillo, and Associated of Baton Rouge would all show interest in Brookshire, which self-distributes out of warehouses in Tyler and Monroe, La. and includes several manufacturing facilities. “Brookshire could also provide a good opportunity for Supervalu to return to Texas,” Flickinger added.

Flickinger said he felt it was less likely that H-E-B would make a play, despite a seeming opportunity to add market share around Dallas. H-E-B, he said, doesn’t often build by acquisition and tends to prefer higher-volume stores in larger markets than Brookshire.

According to SN’s Top 75, sales for the fiscal year ended Sept. 30, 2014, totaled $2 billion, with earnings said to be around $150 million.

A report in Dallas Morning News suggested the chain could fetch as much as $1 billion in a sale.

In a report issued to investors, Deutsche Bank analyst Karen Short said that Kroger could be a logical buyer for Brookshire’s, noting a combination could boost market share in markets where Kroger recently committed to making substantial investments. Kroger said it plans to spend $700 million in the next three years in Dallas and $500 million over the same period in Houston.

“Kroger could look to augment these investments with strategic, fill-in acquisitions, particularly given [its] strong balance sheet and flexibility,” Short said. She expected however that Kroger would look closely to a price of such an acquisition and with an eye on whether EBITDA margins at Brookshire could support Kroger pricing.

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“On the surface, Brookshire appears compelling, with the caveat that Kroger continues to take a very prudent and conservative approach to target multiples,” Short said.

A combination with Brookshire would boost Kroger’s share of the Dallas market from 12.8% to 17%, while increasing share in Tyler-Longview, Texas, from 5.5% to 26.7% and from 5% to 24.6% in Shreveport, La.

Albertsons, whose executives have said would look to grow by acquisition and recently bought Texas-based United Suprmarkets could also have interest sources said, as could Southeastern Grocers, Jacksonville, Fla., were it interested in extending into contiguous markets.

Note: This story was updated Friday to correct the location of Brookshire's warehouses.

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