June 16, 2017 / 3:26 PM / a month ago

INSTANT VIEW 6-Amazon to acquire Whole Foods for $13.7 bln

17 Min Read

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June 16 (Reuters) - Amazon.com Inc is buying Whole Foods Market Inc for about $13.7 billion at a price of $42 a share, the companies said on Friday.

RELATED: * Supermarket stocks fall on announcement * Competition worries hit Europe grocers * BreakingViews: Amazon checks out * Short sellers hit as Whole Foods shares soar * Amazon and Whole Foods gain, U.S. supermarkets feel the pain COMMENTS: BRIAN CULPEPPER, PORTFOLIO MANAGER AT JAMES ADVANTAGE FUNDS, ALPHA, OHIO:

"This is a purchase of the distribution network, not the stores. You might still have people who like to physically go to a Whole Foods and pick out their produce, but if Amazon can figure out a way to deliver fresh organic produce at a price that is better than Kroger’s it will hard for others to compete. This also looks like a way to compete with the Blue Aprons and Hello Freshes of the world.... This makes the multiple for every other consumer stock go down. Amazon is slowly dominating every spectrum right now. We think that big box stores might be able to survive, because people still like to go out and touch a new TV or new stereo before they buy it, even if they aren’t getting the best price."

Culpepper owns shares in Wal-Mart and Kroger, and that Kroger “looks to be a pretty good bargain here” after its steep declines this morning.

SCOTT CROWE, CHIEF INVESTMENT STRATEGIST, CENTERSQUARE INVESTMENT MANAGEMENT, A REAL ASSET INVESTMENT UNIT OF BANK OF NEW YORK MELLON CORP, PHILADELPHIA:

“The toughest component of e-commerce is that last mile of distribution, particularly as consumers expect a shorter and shorter window between ordering something online and getting it delivered. So Whole Foods has very insular locations, it has inventory, it has inventory management, it has all the things you need to satisfy the last mile of distribution for Amazon.

"What probably has happened is that as Amazon has invested in the business of Amazon Fresh and this concept, they figured out physical retailing is not easy, and there’s value in it, and they were probably looking at lot of what Whole Foods is doing and trying to mimic it and probably decided it was easier to buy Whole Foods because assembling a real estate footprint is a business, it’s s full-time job and it takes a skill set.

"This is unequivocally good for retail real estate values, but really selectively. It reinforces the value of better real estate, and it reinforces this bifurcation between better real estate and low quality.

“You’ve had the biggest disruptor of physical retail real estate now make a multi-billion dollar investment in physical locations and what it shows you is there is a huge synergy to be had between e-commerce and physical stores, but only for the very best real estate locations.

"Retail has value, but for the better-located retail that has value, in order to optimize an e-commerce strategy you need that physical real estate because it’s the way in which you physically interact with your customer. If you look at the U.S. retail market that really only applies to about one-third of the retail real estate market in the United States. At the same time the bottom third is increasingly becoming obsolete.”

FOOD AND WATER WATCH, NON-GOVERNMENTAL ORGANIZATION FOCUSED ON CLEAN WATER AND HEALTHY FOODS, WASHINGTON, D.C. - STATEMENT:

“Today, Amazon announced its acquisition of Whole Foods Market. Too few companies already exert outsized influence over our food choices. This is extreme consolidation of the food system in action, which will lead to higher prices, fewer choices for consumers, and bigger profits for billionaires like its owner, Jeff Bezos.

“The top four grocery retailers already control 62 percent of food sales, raising prices and reducing choices for consumers. This nearly $14 billion takeover would combine the dominant online retailing giant with one of the country’s ten biggest supermarket chains.

“Consumers already face substantially reduced options for grocery shopping because of a wave of mega-mergers that have swept the supermarket and grocery manufacturing industry. In recent years, more than 4,000 grocery stores were joined under two owners after the Albertsons-Safeway and Ahold-Delhaize mergers. The proposed Amazon-Whole Foods deal only further curtails consumer choices and raise prices.

“The Federal Trade Commission must block this merger to protect consumers from the anti-competitive practices and higher prices of retail grocery monopolies.”

AJAY JAIN, SENIOR RESEARCH ANALYST, PIVOTAL RESEARCH GROUP, NEW YORK

"We have felt that the only scenario in which Whole Foods would be acquired was if the acquirer was not valuation sensitive. Clearly Amazon fits that profile. Although Amazon had reportedly taken a look at Whole Foods before and walked away, we feel that the Whole Foods management team is clearly under siege and may have been more receptive to partner with a retailer so admired as Amazon.

"Based on the extremely negative sentiment recently expressed by Whole Foods CEO, John Mackey in comments regarding JANA, this outcome is very beneficial to the Whole Foods management team. The buyout avoids a lengthy and highly contentious proxy bottle. In terms of governance issues, John Mackey will retain his leadership position. All of the boxes appear to be checked off from the standpoint of Whole Foods.

"We feel that the valuation is more than fair (especially based on Whole Foods’ rapidly deteriorating fundamentals). We will have more comments after digesting these developments further, but the fate of United Natural Foods Inc (SELL) is very shaky under this transaction based on any change of control provisions for Whole Foods under UNFI’s existing supply agreement. We think this is a dream come true for Whole Foods investors. Without the sale to Amazon, we believe that the outlook for Whole Foods would have been increasingly troubled. We don’t see any other obvious strategic buyers coming to the table."

KIM FORREST, SENIOR EQUITY RESEARCH ANALYST, FORT PITT CAPITAL GROUP, PITTSBURGH:

"I think supermarkets should be very very worried. It has not been a particularly good decade for them because of deflation."

"Look at Kroger's results and it tells you about the deflation. I liked Target last fall with their new emphasis on kids clothing. The part of their business that is grocery made me stay away. It’s really difficult to overcome deflationary effects."

"Amazon is going to deliver. This is the thing they've been missing, an ability to get fresh food closer to people. Whole Foods is everywhere Amazon wants to be in cities where people spend money."

"They're going to use Whole Foods as a distribution method to get fresh food to the home."

"They're trying to replace Fedex and UPS. They should be trading down even lower. You’re going to use Whole Foods as distribution for not only food. You're going to send along that phone or sweater too."

"Look for the sickest (supermarkets) and those are likely the ones that are least well off because of this deal. The one that comes to mind is Supervalu. Kroger has some issues too. The sick ones become poison. They're getting thrown out of people's portfolios today."

"Packaged food has had a tough time. Nobody shops in the middle of the supermarket any more. This has everything to do with sending fresh food out to people. This just hastens their demise."

“Investors care about novelty. Investors are going to flock to this because this whole idea is novel."

CHRIS SAGERS, TEACHES LAW AT THE CLEVELAND-MARSHALL COLLEGE OF LAW, CLEVELAND, OHIO:

“As a matter of policy, should this be blocked? If I'm queen for a day, there should be a challenge to this because there should be a strong presumption against growth by acquisition and in fact there is supposed to be such a presumption in our law. It's what Congress intended.”

“Will the Trump administration challenge it? I think the answer is very unlikely.” BRUCE BITTLES, CHIEF INVESTMENT STRATEGIST, ROBERT W. BAIRD & CO, SARASOTA, FLORIDA:

"The markets are down, and it looks like the uncertainty over the impact of Amazon on the food industry is upsetting the market. I think that's what's happening this morning. How far and how long that's going to go on, I have no idea. I'm surprised Amazon is up this much because they're going into a business where margins are so slim and we're not really sure if consumer behavior is going to change all that much."

"But it certainly is very disruptive for Wal-Mart and Target and some others, and I think that's causing the decline today. Wal-Mart is a big food seller and so the Amazon news is significant because it could be a game changer in terms of how the food industry operates. But it may be an overreaction here because Wal-Mart customers are very different from Whole Foods' customers. So I think (the move) is overdone in probably both Wal-Mart and Target."

"It's also a reflection of the whole industry, and how that's all changing because of Amazon and technology."

"It's disrupting a number of industries here, and that's what's causing the causing the market problems here."

"Amazon's got its tentacles everywhere and that's another place to go. Amazon sees that industry changing significantly – and they see that people don't necessary go to the grocery store anymore."

David Tawil, President, Maglan Capital, New York:

"At least as it relates to groceries, we now have an answer that Amazon is serious. And when Amazon is serious, frankly there is no limit to what they can do in terms of disrupting the space...essentially relegating everything that currently exists in the business obsolete."

"Everybody orders from Amazon right - it crosses all socio-economic lines. But Amazon doesn't have a particular emphasis on the luxury consumer, and maybe they want that exposure"

"Who knows what else they (Amazon) might introduce into the stores... those other grocers are just grocers."

TRIP MILLER, MANAGING PARTNER, GULLANE CAPITAL PARTNERS, MEMPHIS, TENN:

“I think the first reaction is that this deal is good for Amazon, but bad for everybody else who sells food in a store, which is a pretty obvious first reaction. While we knew that Amazon was interested in getting into the food business and having more brick and mortar locations – they had been testing out grocery stores – this shows a large commitment from them to food and having physical drop off points and distribution points for other products they sell to consumers.

"I think this deal helps Amazon potentially in the long term on their shipping side, as Whole Foods locations will provide drop off and pick up points for centralized delivery. I think it’s an interesting fit for Amazon. There is such a focus on healthier, more local food and Amazon is a cutting edge modern company. This puts them right in the forefront of the space.”

JAN ROGERS KNIFFEN, CHIEF EXECUTIVE OF RETAIL CONSULTANCY J. ROGERS KNIFFEN WWE IN NEW YORK:

"I think that I would not like to be somebody playing in the grocery space right now.

"Whole Foods has given up a lot of market share because they didn't capitalize on being the leader in organic, but they still have a footprint. It's a little different when you're Amazon. Whole Foods has to make money, Amazon doesn't have to make money. All Amazon's got to is grow. And now they've got a platform for doing that!

"I think we'll see very aggressive pricing out of Amazon in grocery, which will include the Whole Foods component."

ANDREA MURINO, AN ANTITRUST EXPERT WITH THE LAW FIRM GOODWIN PROCTER LLP IN WASHINGTON D.C.:

“You can't think of this as a traditional antitrust problem because people who go to Whole Foods to touch the produce and get the freshest asparagus are not going to shop at Amazon... I don't think there's any direct Amazon Whole Foods direct competition. My guess is that this will get through.

On how the Federal Trade Commission responds: “There's an efficiency there but there are big questions about what does it all mean? There are some emerging competition issues here about how Amazon is delivering your life, (even) bringing your news. I just think there will be some curiosity here.”

STAN SHIPLEY, FIXED INCOME STRATEGIST AT EVERCORE ISI IN NEW YORK:

“There’s a lot of liquidity in capital markets, a lot of money floating around. Whole Foods, which had a failed business model, is vulnerable to being gobbled up by companies with a successful business model a la Amazon.”

CHARLIE O’SHEA, LEAD RETAIL ANALYST AT MOODY'S INVESTORS SERVICE:

"Amazon’s announcement this morning that it had agreed to acquire Whole Foods Markets for around $14 billion is a transformative transaction, not just for food retail, but for retail in general.

"Implications ripple far beyond the food segment, where dominant players like Wal-Mart, Kroger, Costco, and Target now have to look over their shoulders at the Amazon train coming down the tracks, but also the potential for multi-channel, which Amazon up until now has largely eschewed."

FERNAND DE BOER, ANALYST AT PETERCAM IN AMSTERDAM, NETHERLANDS, WHICH HAS A BUY ON DUTCH GROCER AHOLD:

“This comes at a moment when the sector is very sensitive to bad news. You had the Kroger profit warning, and people are worried about the entrance of Lidl. So people are very nervous. And then they see this and they think – 'If online is going to kill offline, what am I doing in the sector? Sell.' Whether the reaction is exaggerated or not - it feels exaggerated. When sentiment settles a bit people are going to realize that Ahold can compete just fine.”

PHIL BAK, CEO OF ACSI FUNDS, ASSET MANAGER BASED IN ANN ARBOR, MICHIGAN, WHICH HAS HOLDINGS OF AMAZON AND WHOLE FOODS:

"There is really no limit to how far they (Amazon) can take Whole Foods. What Amazon has proven time and again is that they know how to connect the buying experience with what resonates with customers and with what customers will appreciate and want to continue to return to.

"Again we see Amazon leading, and other supermarkets following. How they plan to implement technology in the buying experience remains to be seen."

NEIL SAUNDERS, MANAGING DIRECTOR, GLOBALDATA RETAIL IN NEW YORK:

"I think it is surprising because it comes out the blue. But I think there is a lot of logic in the deal for both parties. I think for Amazon it gives a real foothold now in the food market which is what they have wanted for a very long time and which to do on their own to build up a substantial presence is very difficult. It gives them that opportunity to really grow their presence in grocery which is what they wanted to do all along."

"For Whole Foods it brings an opportunity to really increase operating discipline, to really try to digitalize the offer and to bring technology into stores to increase efficiency which is something they really need to do, because their sales margins are waning and there is an opportunity here for Amazon to bring its expertise and logistics and help them turn around their business.

"I think that Amazon has come to the rescue of a retailer in distress."

BRIAN REYNOLDS, CHIEF MARKET STRATEGIST AT NEW ALBION PARTNERS, A BROKER DEALER IN NEW YORK, NEW YORK:

"If a stock price goes down, like Whole Foods did, that's going to attract activist investors. The deal is not (valued at) the highest price Whole Foods has ever traded at, but it's going significantly above the lows. That illustrates the trend of activists helping to put a floor under stock prices. If the CEO can't get a stock price up, activists will come in to try and do it. That's a huge change from two decades ago. This will put more pressure on grocery stores, especially their CEOs."

TIM GHRISKEY, CHIEF INVESTMENT OFFICER OF SOLARIS ASSET MANAGEMENT IN NEW YORK, NEW YORK:

“That was rumored, I totally dismissed it. Wow. Amazon can pour money into any investment and they don’t need to make money. Investors are used to them not making money. It is $13.7 billion but it is still small relative to the size of the whole company.

"It seems like a bit of an odd purchase because it is brick-and-mortar retail. On the other hand it gives them a distribution footprint to deliver goods in a short time frame. Perishable goods and food aren’t always the best when delivered by FedEx. Obviously canned goods are.

"It gives them a presence, the stores can be expanded to do other things. Amazon has talked about having a brick-and-mortar retail presence where perhaps people just go in to look at things.

"This could be part of that strategy – you take part of a Whole Foods Store and you add in Echo and all the other Amazon products. More and more we will see Amazon brand products as they work to create their own brand at retail.”

Reporting By Sam Forgione, Charles Mikolajczak, Jonathan Spicer, Caroline Valetkevitch, Sinead Carew, Herbert Lash, David Randall in New York; Diane Bartz in Washington; Ross Kerber in Boston; Toby Sterling in Amsterdam; Natalie Grover, Anya George Tharakan, Siddharth Cavale, Rishika Sadam, Sruthi Ramakrishnan, Gayathree Ganesan in Bangalore; Editing by Daniel Bases and David Gaffen.

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