By Harry Brumpton and Greg Roumeliotis
(Reuters) - Apollo Global Management LLC said on Tuesday it will acquire Smart & Final Stores Inc for about $1.1 billion, including debt, the second time the private equity firm will own the U.S. food retailer.
The deal comes after Apollo sold Smart & Final to Ares Management Corp, another buyout firm, in 2012 for $975 million, including debt. It is Apollo's latest bet on the brick-and-mortar grocery sector, even after its last acquisition in the space, its $1.4 billion leveraged buyout of Fresh Market Inc in 2016, has soured amid increasing competition.
Apollo will pay $6.50 per share in cash for Smart & Final, a 21 percent premium to its closing share price on Tuesday. The shares soared in after-hours trading after Reuters reported on the deal ahead of the announcement.
Smart & Final operates 324 grocery and food service stores in California, Oregon, Washington, Arizona, Nevada, Idaho, Montana and Utah.
Ares took Smart & Final public in 2014 at a price of $12 per share. The shares have lost close to half their value since then, as the company struggled in a tough environment for brick-and-mortar retailers. Ares now owns close to 60 percent of the company.
Based in Commerce, California, Smart & Final faces competition from direct rivals and e-commerce firms. Amazon.com Inc acquired Whole Foods Market Inc for $13.7 billion in 2017.
Deep-pocketed international entrants to the U.S. market such as Lidl and Ahold Delhaize, as well as discount retailers such as Walmart Inc and Dollar General Corp, have also been squeezing Smart & Final's profitability.
Apollo plans to split Smart & Final into two operationally separate units, because of their different business model, according to people familiar with the matter.
One unit will comprise the 257 stores operated under the Smart & Final banner, which allow consumers to shop at a discount without a membership fee.
The second unit will comprise 67 stores under the company's Smart Foodservice banner, which sell goods in a no-frills warehouse format to other food businesses such as restaurants and caterers.
Apollo's previous acquisition in the grocery sector, the Fresh Market, has struggled amid a plethora of organic and natural food offerings by rivals. Its bonds trade well below their par value, and credit ratings agency Moody's Investors Service has called its capital structure "unsustainable".
To be sure, Apollo has enjoyed success in the grocery sector as well. It made 10 times its $200 million investment when it cashed out of organic grocer Sprouts Farmers Markets Inc in 2015.
(Reporting by Harry Brumpton and Greg Roumeliotis in New York; Editing by Dan Grebler and Tom Brown)