Digging Into The Fresh Market's Take-Out Math

Shares of The Fresh Market have lost nearly 35 percent since the beginning of 2015. The stock hit a 52-week low of $18.70 back in August following the company’s second-quarter print, which fell short of expectations while management’s outlook reinforced investor’s and many analysts bearish stance.

The stock managed to rebound from its August lows as investors began speculating the company would conduct a strategic review of its business, including a possible sale of itself. The speculation culminated in media reports that suggested the company’s Founder and Chairman Ray Berry is exploring a bid for the company with the assistance of Apollo Global Management, a private equity firm.

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

Analyst's Take

Kelly Bania of BMO Capital Markets commented on a potential transaction, noting that The Fresh Market’s CEO Rick Anicetti’s resume “clearly highlights” his private equity experience and “possible connection” to Apollo.

Bania continued that the company’s stock was trading at 6.1x fiscal 2017 EV/EBITDA estimates prior to the news reports and “appear undemanding” at a current 6.x multiple. The analyst added that the “challenge” for any potential acquirer is “ascertaining the appropriate valuation” for a company that is “experiencing an identity crisis” as it “struggles’ to maintain its industry-leading EBITDA margins.

Bania added that the “take-out math” is “highly dependent” on long-term EBITDA margin assumptions. The analyst assumed the company would lower its margin structure by 200-300 basis points to a range of 7 to 8 percent to become more price-aggressive in the “fast-changing” food retail landscape.

Rating And Price Target

Finally, Bania maintained a Market Perform rating with a price target raised to $27 (implies a 6.5-7.0x fiscal 2017 EV/EBITDA multiple) from a previous $21 given the opportunity of a private equity takeout.

However, the analyst did warn that there is risk, as a transaction “might be completed at or above these levels given the uncertainty in forecasting a sustainable long-term EBITDA margin structure for the company.”

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