Apollo Starts Cashing Out of Sprouts, Months After Well-Bid IPO

With shares of Sprouts Farmers Markets Inc.(SFM) having more than doubled in price in just four months since their $383 million initial public offering, a group of its financial backers led by Apollo Global Management LLC(APO) are cashing out with an offering of more than double that size.

Apollo and a slate of insiders including Sprouts co-founder Shon Boney plan to offer 22.5 million shares in the company late Thursday, according to a regulatory filing. That’s a stake valued at roughly $859 million as of the stock’s Wednesday close.

Stock offerings by executives or private-equity investors a few months after an IPO are routine, enabling such early holders to take some chips off the table.

But the Sprouts offering’s size relative to the IPO–potentially raising more than double the proceeds–is significantly larger than the norm. Since 2000, U.S.-listed companies’ first follow-on offerings have raised 7% more, on average, than their IPOs, according to Dealogic.

And buyout firms have been selling relatively little stock in IPOs this year, meaning they may be leaving a larger share of such exits for follow-on offerings. In financial sponsor-backed U.S. IPOs this year, an average 11% of the stock sold has been offered by existing holders, down from 19% in 2012 and the lowest share since 2001, according to Dealogic.

With Sprouts, the sellers are offering as much as 22% more shares than were sold in the IPO–including the potential sale of some shares by underwriters–compared with an average 1% such increase from IPOs to first follow-on offerings since 2010, according to Dealogic.

The Sprouts offering follows blockbuster demand for the company’s July IPO. The shares fetched a higher price than expected and soared 123% in their trading debut, the biggest opening-day pop for any U.S.-listed company this year. Through Wednesday, the stock remained up 112% from the IPO offer price.

The company’s rapid expansion and its margins–unusually high for the grocery sector–make it “one of the best growth stories within the consumer staples category,” said Troy Huff, a senior research analyst at Nuveen Asset Management.

Mr. Huff’s group bought stock in Sprouts’ IPO but sold it shortly thereafter as the shares rocketed past his price target, he said. Meanwhile, he said he rarely buys shares in secondary offerings because “management or the private equity backers nearly always have a different agenda than me. They think they’re getting out at a good price and they’re typically very smart people.”

Many of the recent class of IPOs have seen outsized stock-price gains. Through the end of last week, companies that had gone public in the U.S. this year had seen their shares climb 30%, on average, from their IPO price according to Dealogic.

Some of the high fliers could be in for bouts of indigestion as secondary offerings are announced. Sprouts disclosed that Apollo and the other sellers had registered for the offering after the market closed on Nov. 7, at the same time it reported better-than-expected earnings. The stock fell the next nine sessions, declining 18%.

Apollo will remain Sprouts’ top holder after the deal, but the offering is set to cut the firm’s stake to 36.2% from 44.5%, according to a regulatory filing.

Goldman Sachs Group Inc. is leading the offering with Credit Suisse Group AG.