Trading in Sprouts Farmers Market ahead of report on merger raises eyebrows

NEW YORK (Reuters) - Trading in Sprouts Farmers Market Inc's SFM.O shares and options surged last week ahead of a report that the natural-foods retailer was the subject of merger talks, raising questions about whether news of a possible deal was leaked.

A billboard advertisement for Sprouts Farmers Market, a health food chain store, is shown in Encinitas, California September 9, 2014. REUTERS/Mike Blake

On Sunday, Bloomberg reported that the Cerberus Capital-backed food and drug retailer Albertsons Cos had held preliminary merger talks with Sprouts in recent weeks. Sprouts shares rose about 5 percent on Monday, before reversing course to trade down 1 percent at $21.79.

The swings Monday in trading of Sprouts shares come on the heels of a surge in its stock price on Thursday and Friday, and a record-breaking rush of trading in its options.

Representatives for Albertsons and for Sprouts did not immediately respond to requests for comment, while a spokeswoman for Cerberus declined to comment.

“I expect regulators will look into the (options) activity,” said Henry Schwartz, president at options analytics firm Trade Alert.

Sprouts shares, which touched an 18-month low on March 7, rallied 11 percent on Thursday, with roughly half the gains coming in the last hour of trading. Nearly 9 million shares changed hands in the final hour of trading on Thursday, making it the busiest hour of trading in at least a year.

At the same time in the options market, the last hour of trading saw roughly 15,000 contracts, or about 14 times Sprouts’ average daily trading volume, change hands, Trade Alert said.

By Monday, the number of open call contracts on Sprouts’ shares jumped to 31,687, a 16-month high, per Trade Alert.

“When open interest increases like this it does lend credence to questions about who knew what when,” said Kevin Kelly, chief investment officer at Recon Capital Partners, a Stamford, Connecticut-based investment firm.

Sprouts has seen bursts of bullish call flow before, and with peer Whole Foods Market Inc WFM.O having been mentioned as a potential candidate for a deal in the recent past, it's likely traders were on the lookout for any signs of unusually well-informed call buying, Schwartz said.

Still, the activity gave options traders a strong belief in a near-term catalyst for Sprouts shares, Recon’s Kelly said.

“It’s not normal that just because the shares price were up that people would then start getting into the calls,” Kelly said.

The sharp spike in Sprouts share price made for big gains for some timely options trades.

For example, on Thursday, while Sprouts shares were at $19.93, a trader bought 408 calls betting on the shares climbing above $20 by April 21. These calls, which were bought for 70 cents on Thursday, traded for an average price of $2.34 on Monday, per Thomson Reuters data.

The U.S. Securities and Exchange Commission declined to comment on the trading activity.

Editing by Daniel Bases and Bernadette Baum