uploads///TFM APO comps

Could The Fresh Market Deal Become Competitive?


Dec. 4 2020, Updated 10:53 a.m. ET

Competitive deals can make your quarter

Competitive deals can make your quarter if you’re a merger arbitrage professional. If you get two companies bidding against each other, a 1% gross spread can easily become a 10% gross spread by the time everything is said and done. We saw that happen in the Salix Pharmaceuticals deal.

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Purchase price was a high premium

The $28.50 purchase price was a high premium of over 24% to where The Fresh Market (TFM) was trading on March 11, 2016—the day before the deal was announced. There was already speculation in the press starting in mid-February that The Fresh Market was in deal talks. Compared to the undisturbed price prior to press speculation, the premium is over 50%. This is a high premium, especially for a private equity deal.

Deal comparisons

Arbitrageurs often compare the price the acquirer is paying to the prices of other deals in the same industry. This is always more of an art than science. No two companies are alike and interest rate environments change. The best comparisons for this transaction include the following:

  • Wild Oats-Whole Foods
  • Safeway-Cerberus
  • Family Dollar-Dollar Tree

These transactions are the closest deals to the Apollo-The Fresh Market merger. That said, some of these companies had different growth rates and occurred a while ago. So, making comparisons is difficult.

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In this transaction, Apollo (APO) is paying about 0.7x revenue and 7.9x EBITDA (earnings before interest, tax, depreciation, and amortization). The revenue multiple is slightly higher than the average revenue multiple for the comparable transactions—0.7x versus 0.6x. It’s lower than the comparable EBITDA multiples—7.9x versus 10.5x. Overall, the multiples look fair.

Other merger arbitrage resources

Other important merger spreads include the Cigna (CI)-Anthem (ANTM) deal. It’s slated to close in 2H16. The Apollo-ADT (ADT) merger is another important deal. For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.

Investors who are interested in trading in the retail sector should look at the S&P SPDR Retail ETF (XRT).


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