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Term Sheet — Monday, October 5

October 5, 2015, 1:59 PM UTC

The next big deal?

Whole Foods (Nasdaq: WFM) stock spiked more than 8.5% on Friday for no particular reason (and is up a bit more in early trading today). Or, in Wall Street parlance, people think it’s a takeover target.

Such things usually go nowhere, and I have not yet heard any particular suitors attached to Whole Foods. But such a deal does, indeed, make sense. At least from a private equity perspective. Here are 7 reasons why:

1. The stock is cheap: Whole Foods has been trading around a four-year low, despite 50% higher revenue and 40% higher EBITDA than in 2011. Plus, there is much interest in its product category that retail giants like Wal-Mart and Target are trying to ape it. Private equity is always looking for a bargain. (Yes, I used Whole Foods and bargain in the same paragraph without even a hint of irony).

2. Leverage light: There is nothing private equity firms like more than companies that they can load up with leverage, and Whole Foods is just begging for it. It has absolutely no long-term debt, and only around $60 million of capital lease liabilities. Even if current management dislikes the idea of debt — and it does — it may like the alternative of activist shareholders even less.

3. Favorable comp coming: The nation’s largest supermarket chain, Albertsons, is expected to go public later this month. Were it to price in the middle of a range set last Friday, its initial market cap would be around 12.5x EBITDA. Whole Foods is currently trading at less than 10x EBITDA. Oh, and it’s worth noting that Albertsons is currently owned by a private equity firm.

4. Past is predicate: Whole Foods is not a stranger to private equity. In 2008, Leonard Green & Partners invested $425 million for preferred stock that equated to around a 17% ownership interest. The deal worked out well for both sides — with Whole Foods stock subsequently climbing and Leonard Green later exiting with substantial profits. In fact, the partnership was considered so positive that Whole Foods still had a pair of Leonard Green partners on its board of directors. Having a minority, equity-only investor is different than having an LBO owner, but at least co-CEOs John Mackey and Walter Robb should have a positive predisposition toward the asset class (and perhaps know how to navigate it a bit). And that goes both ways as private equity, despite its reputation, prefers to partner with existing management than to find new C-suiters.

5. Alt assets: When purchasing retailers, private equity firms often favor those that own at least some of their own real estate. Not so much to ride rising property value, but because they can work in sale-leaseback transactions that remove a bit of the risk. Whole Foods doesn’t own the majority of its stores, but it’s got enough that could help make a prospective buyer feel a bit more comfortable.

6. Chop chop: Private equity likes to talk a lot about operational efficiency (read: cost cuts), and Whole Foods last week acknowledged some bloat by saying it would lay off 1,500 employees. Expect there are other areas of the chain’s cost structure that could be slimmed down.

7. Price point: Were a private equity firm to bid a 20% premium to Friday’s closing price (remember, it finished up 8.5%), that would mean around $13.5 billion. That’s at the outer limits of manageable right now for PE, but outer limits count. By keeping with recent Fed guidance, a private equity firm could pull around $8.5 billion in debt to finance the deal, meaning it would need $5 billion in equity. But lots of big deals are being done above that limit, particularly if the business has strong cash-flow (which Whole Foods does). So a private equity buyer would likely need to come up with around $4 billion in equity, which could be done either by partnering with another private equity firm (which firms tend to avoid doing right now) or by tapping their bigger limited partners for co-investments (which firms do all the time right now). Again, tough but doable.

To be clear, none of this means Whole Foods will get a takeover offer. Or that it would come from private equity, particularly given that relatively few firms have deep sector expertise (it’s tough to imagine Cerberus wanting more grocery exposure, although Leonard Green would be an interesting minority co-investor for a larger firm).

But stocks don’t normally spike on a Friday for no reason. They spike when there are seven reasons.


 Trian Fund Management, the activist investment firm led by Nelson Peltz, disclosed that it has amassed a $2.5 billion stake in General Electric (NYSE: GE), becoming one of the conglomerate’s largest shareholders in the conglomerate. Read more.


 YouNow, a New York-based “live social network that connects audiences and broadcasters in real time,” has raised $15 million in new VC funding. Return backers Venrock and Oren Zeev co-led the round, and were joined by new investor Comcast Ventures.

 Pioneer Square Labs, a new startup studio in Seattle, has raised $12.5 million in funding. Foundry Group led the round, and was joined by Bezos Expeditions, Greycroft Partners, Madrona Venture Group, Maveron, Menlo Ventures, MHS Capital, Sinclair Digital Ventures, Techstars Ventures, Trilogy Equity Partners, True Ventures, Voyager Capital and Vulcan Capital. There also were over 50 angel investors participating. Read more.

 Draper James, an American South-inspired lifestyle brand founded by actress Reese Witherspoon, has raised $10 million in Series B funding. Forerunner Ventures led the round, and was joined by Stone Canyon Industries and JH Partners. Read more.

 RunTitle, an Austin, Texas-based oil and gas data startup, has raised $8 million in Series A funding. Founders Fund led the round, and was joined by Deep Fork Capital and return backer Austin Ventures.


 AP Exhaust Technologies LLC, a Goldsboro, N.C.-based portfolio company of Audax Group, has acquired Eastern Catalytic, a Langhorne, Penn.-based provider of catalytic converters for the automotive light duty aftermarket. No financial terms were disclosed.

 Apollo Global Management and Capita (LSE: CPI) each have offered to acquire UK business outsourcer Xchanging PLC (LSE: XCH) for upwards of £421 million. Read more.

 BC Partners and Canada Pension Plan Investment Board are in talks to acquire more than $1 billion in Cablevision (NYSE: CVC) stock, as part of Altice NV’s pending $19.4 billion takeover of the U.S. cable provider, according to Bloomberg. Read more.

 The Duran Group, a German portfolio company of One Equity Partners, has acquired Wheaton Industries Inc., a Millville, N.J.-based maker of lab glassware, consumables and related products, from Incline Equity Partners. No financial terms were disclosed.

 GE Capital has agreed to sell its $2.5 billion corporate aircraft lease and loan portfolio to Global Jet Capital, which was formed last year by The Carlyle Group, Franklin Square Capital Partners and AE Industrial Partners.

 Hellman & Friedman acquired a majority stake in Securitas Direct Verisure Group, a European provider of professionally-monitored home alarm systems, from Bain Capital. No financial terms were disclosed.

 H.I.G. Capital has acquired Universal Fiber Systems LLC, a Bristol, Va.-based producer of custom solution-dyed synthetic fibers, from The Sterling Group and The Stephens Group. No financial terms were disclosed.

 Irving Place Capital has acquired Ohio Transmission Corp., a Columbus, Ohio-based distributor of mechanical power transmission equipment and pumps, from Frontenac Co. No financial terms were disclosed.

 Nestle is in talks to merge its international ice cream business with R&R Ice Cream in a $3.4 billion transaction, according to Reuters. R&R is owned by PAI Partners and Graphite Capital. Read more.

 Strait Lane Capital Partners has acquired Griswold Corp., a Moosup, Conn.-based maker of open-cell rubber and urethane foam products. No financial terms were disclosed.

 Telular Corp., a Chicago-based portfolio company of Avista Capital, has acquired SmartLogix, a Fort Mill, S.C.-based provider of petroleum management, inventory and transportation logistics solutions. No financial terms were disclosed.


 Adesto Technologies Corp., a Sunnyvale, Calif.-based provider of non-volatile memory products for Internet of Things apps, has set its IPO terms to 4.1 million shares being offered at between $10 and $12 per share. It would have an initial market cap of approximately $153.4 million, were it to price in the middle of its range. The company plans to trade on the Nasdaq under ticker symbol IOTS, with Needham & Co. and Oppenheimer & Co. serving as lead underwriters. Adesto reports a $4 million net loss on around $20 million in revenue for the first half of 2015, and has raised over $50 million in VC funding from firms like ARCH Venture Partners (19.4% pre-IPO stake), Harris & Harris Group (16.2%), Applied Ventures (15.6%), ATA Ventures (11.2%), Adams Street Partners (10.1%) and Altera Corp. (8%).

 Laureate Education Inc., a Baltimore-based for-profit education company owned by KKR, has filed for a $100 million IPO. It plans to trade under ticker symbol LAUR, with Morgan Stanley, Credit Suisse and Barclays serving as lead underwriters. The company reports a $169 million net loss on $2.16 billion in revenue for the first half of 2015. KKR led a take-private buyout of  Laureate in 2007, and was joined by co-investors Citigroup Private Equity, Sterling Capital, SAC CApoital, SPG Partners, Bregal Investments, Caisse de depot et placement du Quebec, Torreal SA and Southern Cross Capital.


 Blackbaud Inc. (Nasdaq: BLKB) has acquired Smart Tuition, a Woodbridge, N.J. -based provider of payment software and services for private schools and parents, for $190 million. Sellers include Charter Oak Private Equity, GarMark Advisors and Lyrical Partners.

  IBM (NYSE: IBM) has agreed to acquire Cleversafe, a Chicago-based specialist in hybrid cloud storage, for an undisclosed amount. Cleversafe had raised around $100 million in VC funding from firms like New Enterprise Associates, OCA Ventures and Motorola Solutions Venture Capital. Read more.

 Warburg Pincus has spoken to investment banks about launching a sale process for the Mutual Fund Store, an Overland Park, Calif.-based investment and consumer finance advisor that could be worth around $700 million, according to Bloomberg. Read more.


 American Apparel (NYSE: APP), a Los Angeles-based apparel retailer, has filed for bankruptcy protection. Read more.

 ANA Holdings (Tokyo: 9202) is considering the acquisition of an equity stake in Vietnam Airlines, which was partially privatized last year, according to the FT. Read more.

 Extra Space Storage Inc. (NYSE: EXR), a Salt Lake City-based owner and operator of self-storage properties, has completed its $1.4 billion acquisition of Ladera Ranch, Calif.-based SmartStop Self Storage Inc.

 Microsoft (Nasdaq: MSFT) has acquired Havok Software, an Irish provider of “3D physics” for gaming, from Intel Corp. (Nasdaq: INTC). No financial terms were disclosed. Read more.

 Nordex, a listed German wind-power company, has agreed to buy Spanish wind power company Acciona (CATS: ANA) for approximately $880 million in cash and stock. Read more.

 Potash Corp. of Sakatchewan (TSX: POT) has pulled its €7.8 billion takeover bid for listed German rival K&S AG, due to both market conditions and a lack of engagement by K&S management. Read more.


 Fidelity Biosciences and the tech VC group of Devonshire Investors -- both affiliates of Fidelity Investments -- have merged to form F-Prime Capital (which will remain under the Fidelity umbrella).

 Octopus Ventures, a London-based VC firm, has launched a $140 million fund focused on later-stage opportunities, including for follow-on rounds for existing Octopus portfolio companies.

 Shamrock Capital Group, a Los Angeles-based growth equity firm, is targeting $600 million for its fourth fund, Fortune has learned. Read more.


 Battery Ventures has promoted Russell Fleischer to general partner and Morad Elhafed to partner. Fleischer, the former CEO of HighJump, had been an executive-in-residence with Battery since last year. Elhafed joined Battery in 2008, and most recently served as a principal. Both men are based in the firm’s Boston office.

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