Does A Private Equity Buyout Make Sense For The Fresh Market?

• Shares of The Fresh Market Inc TFM have lost more than 35 percent year-to-date, but spiked higher on Friday.
• Various media outlets reported that the company's founder Ray Berry is working with Apollo Global Management to explore a potential buyout of the company.
• Rupesh Parikh of Oppenheimer estimated a fair value in a buyout to be $25 to $29 per share, with the low end of the range "more likely."

Shares of The Fresh Market gained more than 7 percent on Friday after media outlets reported that the company's chairman and founder Ray Berry is working with Apollo Global Management to explore a potential buyout of the company.

In a report published Monday, Rupesh Parikh of Oppenheimer examined a potential buyout. The analyst pointed out that the company has no outstanding debt (aside from lease obligations) and generates a positive free cash flow despite "meaningful" store investments.

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Parikh referenced Kroger Co KR's acquisition of Harris Teeter in which the company paid about 7x forward EBITDA forecasts for the chain. At that time, Harris Teeter was generating positive comps and earnings growth while The Fresh Market is expected to show negative comps and earnings growth this year.

Parikh said a 7x multiple on a forward EBITDA forecasts is the "best-case" scenario and yields a $29 per share value while a 6x multiple yields a $25 per share value - a valuation that "makes more sense."

Parikh added that the media reports suggested no offer has been made, and a deal may not finalize in the end. The analyst cited the ongoing competitive environment from The Fresh Market's peers (i.e Trader Joe's) and non-traditional grocers like Kroger.

Finally, Parikh pointed out that Apollo Global has successfully exited its holdings in Sprouts Farmers Market Inc SFM in a "very profitable" transaction through an IPO and secondary offering. This success "could hold relevance" in a new transaction with The Fresh Market.

Parikh maintained a Perform rating and $24 price target on shares of The Fresh Market.