The Fresh Market (TFM) Takeover Seen as Best Case Scenario at Deutsche Bank

Deutsche Bank maintained a Hold rating on The Fresh Market (NASDAQ: TFM) and raised its price target to $28.50 (from $27.00). Earlier The Fresh Market announced an agreement to be acquired by Apollo Global Management for $28.50 per share. In the view of analsyt, Karen Short a take-out is the best case scenario for shareholders.

"The $28.50 represents a 24% premium to the closing price on Friday, 3/11, and a 53% premium to the closing price on 2/10/16, the day prior to press speculation regarding a transaction. The $28.50 represents 7.0x FY15E EV/EBITDA and 6.5x EV/FY16E EBITDA. However, if we adjust our model to a more sustainable EBITDA margin level of 8.0% - versus our existing estimate of 9.8% (which, in our view, was unsustainable) - then the implied take-out multiple is 8.1x, in-line with WFM (note that we are modeling WFM’s FY16E EBITDA marginsat 8.4%, which likely also needs to come down). While TFM shares had already moved up following the initial press reports post 2/10/16, skepticism remained high as evidenced by TFM’s 15.5% short interest (7.5 days to cover). Overall, we believe the transaction is very positive for TFM shareholders given the significant competitive challenges facing the company," said Short.

Discussing implications for peers, Short said, "Both TFM and WFM – the two higher priced operators in the space – have been struggling of late to generate positive comps. Despite these weakening comps, and in the face of increasing competition, TFM has (so far) remained committed to growing units (most recently at 9% annually). We have long argued that the TFM should slow unit growth even further (or stop growing units entirely), because at least with no unit growth, the story becomes a very compelling free cash flow story (depending on one’s view of the sustainability of the cash flows). In fact – based on our published FY16 estimates – we estimate that with maintenance-only capex (2% of sales), the FCF yield would be compelling - in the 8% range. Therefore, we are optimistic TFM will further slow unit growth under Apollo’s guidance in order to alleviate the temporary saturation (excess supply) we have consistently discussed, leading to better returns industry-wide."

For an analyst ratings summary and ratings history on The Fresh Market click here. For more ratings news on The Fresh Market click here.

Shares of The Fresh Market closed at $22.98 yesterday.

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