24/7 Wall St.

It was reported Sunday by Bloomberg that Albertsons and Sprouts Farmers Market Inc. (NASDAQ: SFM) held preliminary merger talks with proposed plans to take Sprouts private. It’s worth noting that the article said the talks are at an early stage and may not lead to a deal. But this has not stopped analysts from speculating on the future of Sprouts as an acquisition target.

In a recent report, Oppenheimer issued a Perform rating for the organic grocer. The firm met with Sprouts management last Thursday. As indicated in its note last week, the firm walked away more positive on the story, and the tone of the management team was upbeat on the business. To the extent that Sprouts is in play, Oppenheimer would expect Kroger Co. (NYSE: KR) and Whole Foods Market Inc. (NASDAQ: WFM) to also be interested.

The firm suspects a high $20s to low $30s per share range would be a minimum to get a deal done, as industry valuations currently are depressed due in part to deflationary pressures. Oppenheimer expects Whole Foods to be up in sympathy.

Oppenheimer is lifting its 2017 forecasts to primarily reflect these most recent views on deflation and gross margins. For 2018, the firm assumes management returns to longer-term targets for now, as this would likely represent Sprout’s base case scenario in the evaluation of any buyout offer.

Previously, Oppenheimer expected Sprouts to have earnings per share (EPS) of $0.84 and $0.88 in 2017 and 2018, respectively. The firm now raised its estimates to $0.92 and $1.06, respectively. Consensus estimates from Thomson Reuters call for $0.88 and $1.01, respectively.

Based on a $22 stock price, Oppenheimer doesn’t think the market believes that Sprouts can return to a mid-teens EBITDA growth rate, while management likely does. The firm also does not believe Sprouts is in a rush to consummate a deal as a return to inflation.

Oppenheimer outlined how Sprouts could fit into Kroger’s portfolio:

We believe Kroger would be interested if Sprouts is in play. The company looks favorably upon the smaller format box as evidenced by the Lucky’s partnership. Geographically, this would also remove a key market share grabbing competitor of Kroger boxes in a growing number of markets.

Separately, the firm believes that Sprouts could help out Whole Foods on the value side:

As Whole Foods broadens its customer base with the 365 concept, we believe Sprouts could represent a compelling box to achieve its goals. For us, the sticking point would be valuation especially if potentially bigger-pocketed rivals are in the mix. As we illustrate inside, the math does not appear compelling for Whole Foods.

Shares of Sprouts were last seen up 0.7% at $21.97 on Tuesday, with a consensus analyst price target of $22.94 and a 52-week trading range of $17.38 to $29.92.

Whole Foods traded flat at $29.83, in a 52-week range of $27.67 to $35.58. The consensus price target is $28.55.

Kroger shares were up 0.5% at $29.33. The consensus price target is $34.90, and a 52-week range is $28.29 to $39.22.