On what was a slow news day, it got exciting real quick as Whole Foods (WFM) announced it has agreed to be acquired by Amazon (AMZN) for $42 per share (27% premium) in an all-cash transaction valued at approximately $13.7 bln, including WFM's net debt. The deal is expected to close in 2H17.
There is not a lot of detail in the press release, but AMZN has been making a big push into groceries. It's a large and underpenetrated market by online competitors. Keep in mind that Kroger (KR) sold off yesterday after lowering guidance. Briefing.com surmised that online competition may already have started to have an impact on the financial statements of some grocery chains.
But this is not all about groceries. Buying Whole Foods also provides another platform to promote its Amazon Prime service. It's a good way to do it as WFM's customer tend to be more upper income. Another aspect to this is that it represents some stepped up competition for Amazon competitors such as big box retailers and Whole Foods competitors such as traditional grocers and other specialty grocers.
As such, both groups are trading sharply lower:
- Big box retailers moving lower: Target (TGT -10%), WalMart (WMT -6%), Costco (COST -8%)
- Grocery peers moving lower: Kroger (KR -14%), Sprouts Farmers Market (SFM -9%), Supervalu (SVU -17%), United Natural Foods (UNFI -17%)
The retail space is in transition and this acquisition makes for an interesting case of the premier hi-tech/online retailer acquiring a unique retailer rather than building one in order to gain a physical store presence. This is also unique in the sense that AMZN will use WFM as a platform to grow their Prime membership program in order to continue to gain market share in other aspects of retail. The deal also provides Amazon with a substantial distribution system.
Whole Foods Market will continue to operate stores under the Whole Foods Market brand and source from trusted vendors and partners around the world. John Mackey will remain as CEO of Whole Foods Market and Whole Foods Market's headquarters will stay in Austin, Texas.
In sum, we have to say we are quite surprised by this deal. One thing that surprised us was that it was all-cash. You would think AMZN would use the big move in its stock (hit $1,000 recently) as currency for the transaction but it was all cash. It looks like AMZN will raise debt to finance the deal. AMZN's stock is up on the news. The fact that cash and not stock was not used to finance the deal is partly why and also investors seem pretty happy with AMZN's bold move. We will see how this plays out over the coming years but there is definitely some skepticism as to whether this deal makes sense.