(Reuters) – Private equity firm Sycamore Partners is in talks with regional discount store operator Fred’s Inc about a potential takeover, according to people familiar with the matter.
The talks are at an early stage, the people said, cautioning that no bid may surface. There is at least one other party in talks with Fred’s, two of the people said, without disclosing its identity.
The sources asked not to be identified because the talks are confidential. Sycamore, which is led by retail veteran Stefan Kaluzny, declined to comment. Fred’s did not immediately respond to a request for comment.
Memphis-based Fred’s, which has a market capitalization of around $600 million, said in January it had hired financial advisers Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz) and Peter J. Solomon Co to explore strategic alternatives after weak holiday sales.
Shares of Fred’s had fallen nearly 20 percent since the beginning of the year. They jumped more than 10 percent on Thursday on news of the talks with Sycamore.
Founded in 1947, Fred’s sells discount merchandise in 700 locations around the southeastern United States and operates pharmacies within its stores. Most of its locations are in towns with populations of 15,000 or less.
Its competitors include Dollar General Corp (DG.N: Quote, Profile, Research, Stock Buzz), Family Dollar Stores Inc (FDO.N: Quote, Profile, Research, Stock Buzz) and Dollar Tree Inc (DLTR.O: Quote, Profile, Research, Stock Buzz).
Fred’s total sales for the first five months of fiscal 2014 were $840.9 million, roughly flat compared with the same period last year.
A takeover of Fred’s would represent a new strategy for Sycamore, which until now has invested solely in apparel and footwear companies, including Aeropostale Inc (ARO.N: Quote, Profile, Research, Stock Buzz), Coldwater Creek, Hot Topic, Jones New York and Talbots. It is also attempting to take over women’s apparel retailer Express IncGet your FREE trial or subscribe now to Buyouts to find new deal opportunities, super-charge your fundraising efforts and track top managers.