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Investors have zeroed in on what could be an appetizing situation developing at

Wild Oats Markets

( OATS).

The stock has vaulted more than 20% this month, hitting a 52-week high of $15.65 Monday after famed supermarket investor Ron Burkle quietly disclosed late Friday that he boosted his stake in the natural-foods market chain to 14.9% from 9.2%. Part of the upswing in the stock may come from a short squeeze, since around 16.4% of the outstanding shares are held by investors betting the price will go down.

Burkle, through his hedge fund, Yucaipa, has been a passive investor in the chain since last March, and he reiterated that position Friday. But he added to his position at prices 68% higher, on average, than where he originally bought the stock. Furthermore, his history in the grocery business, coupled with some suggestive language in the regulatory filing, could signal that he may soon be sowing his Wild Oats.

"This represents a dramatic change and could foreshadow more aggressive efforts by Yucaipa to increase visibility on the earning power of the underlying business," said Bear Stearns analyst Robert Summers in a recent research note. (Bear Stearns makes a market in shares of Wild Oats.)

In Wall Street jargon, that means major structural changes could be afoot at Wild Oats -- possibly including a leveraged buyout or a merger of some kind -- and all the short-sellers swarming around the stock could get mauled.

There's a buyout wave crashing over the retail sector now, as financiers see room for consolidation and real estate sales among outdated business models. This is particularly evident in the stodgy grocery business, where the rise of






have wreaked havoc.

Once a bag-boy in a grocery store and now a prominent contributor to the Democratic Party, Burkle was a bidder last year for


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, the grocery chain that recently agreed to be sold to an investment group including







Cerberus Capital Management

. Burkle recently acquired a stake in


( PTMK) for $150 million.

In the 1990s, Burkle bought Chicago-based


for $700 million and sold it to



three years later for $1.8 billion. He was also chairman of grocery chain

Fred Meyer

while Wild Oats' current chairman, Robert Miller, was CEO. The new vice president of operations at Wild Oats, Samuel Martin, was a sales executive at Fred Meyer. The chain was sold to



in 1999 for $8 million in stock.

''I have been a longtime believer in consolidation in the supermarket industry,'' Burkle was quoted as saying at the time.

Friday's filing included language saying that Wild Oats Markets may engage with other persons or entities "regarding potential strategic transactions involving the company and other supermarket and retail companies." It also mentioned the possibility of "an extraordinary transaction, such as merger or consolidation of the company" with Yucaipa or a third party.

The recent addition of Martin marks the third vice president of operations at Wild Oats in less than a year, and Wild Oats remains the ugly stepsister to

Whole Foods Market

( WFMI) in a Cinderella industry -- the organic health food market. Specialty-foods stores and chains like Whole Foods are stealing market share from supermarkets for high-end products, but Wild Oats, which also runs a food chain called Henry's Marketplace, has been largely unprofitable.

"You have a company in a great industry that's growing much faster than the overall food industry, yet the company continues to struggle," says Morningstar analyst Mitchell Corwin. "Why can't a company operating in an industry with good growth characteristics and an opportunity to charge premium prices achieve at least average profitability?"

The Boulder, Colo.-based company still struggles with a hangover from an acquisition binge in the 1990s that doubled its size under the leadership of its founder, Mike Gilliland. The chain moved into bad store locations in far-flung areas, and it almost went bankrupt as a result. In 2001, Perry Odak, the former head of ice cream maker Ben & Jerry's, was brought on as president and chief executive, and he has tried to bring the company's cost structure in line and gets its store mix right.

"Management has had a few years now to right the ship, and it's probably moving along slower than a lot of people expected," Corwin said.

Before the recent runup, Wild Oats' stock price was below where it began 2004 at $12.93. Its sales growth has slowed in recent years as the company closed underperforming stores, and its net income and operating income have declined for two years in a row, with a loss in 2004.

"By over-emphasizing the purity of their food -- the natural and organic aspect -- I think they missed out on attracting a wide-range of high-end customers like Whole Foods did," Corwin says. "They limited their customer base, and that's why their brand hasn't caught on like the Whole Foods brand."

Late Wednesday, Whole Foods posted a 26% rise in its fiscal first-quarter profit to $50.3 million, or 40 cents a share, as sales rose 22% to $1.67 billion.

Wild Oats is expected to post a 2005 profit of 6 cents a share when it reports results next week, but its gross margins are still expected to be under 30%, while Whole Foods' gross margins are around 35%. In a low-margin business like groceries, that's a big difference. Meanwhile, with Wild Oats' square footage growing 8% to 10% a year and its operations still barely profitable, analysts have raised the specter of a liquidity crunch.

With its market cap at $421 million and long-term debt of $170 million, the company could be acquired by a large supermarket chain looking to tap into growth in organic foods. It also could be taken private by a private equity group.

"I think something structural needs to happen for Wild Oats to really get the liftoff that they're looking for, and Burkle is just the guy to orchestrate that," says Jason Whitmer, an analyst with FTN Midwest Research Group (he does not own shares in the company, and his firm has no banking relationship with it). "It's been a challenge for them to get their business going on a consistent path to success. Burkle could try to play it through a consolidation route. There's reasonable speculation that he might get his hand in the cookie jar a little bit more."