OCTOBER 2018 : AMAZON TO ACQUIRE WHOLE FOODS

Amazon (NYSE : NASDAQ) – Market cap as of 12/10/2017 : $480,82 Md

Introduction

On Saturday August 17, 2017, Amazon and Whole Foods Market today announced the closing of Amazon’s acquisition of Whole Foods Market. The e-commerce giant beat out two industry players and four private equity firms in its pursuit of Whole Foods Market (including the grocery company Albertsons and the activist fund Jana Partners).

The transaction valuating Whole Foods Market at $13.7bn ($42 per share) is the largest deal so far for the ecommerce group which seeks to exploit its online scale to challenge the other giants of food retailing like Walmart. Buying Whole Foods Market, the biggest premium grocer in the US, will radically accelerate Amazon’s ambitions in the $800bn US food and grocery sector that the Seattle-based group begun to penetrate with grocery deliveries.

About Amazon

Amazon (Amazon.com) is an international e-commerce company offering online retail, computing services, consumer electronics, digital content as well as other local services such as daily deals and groceries. Founded in 1994 by Jeff Bezos, the current chairman and CEO of the company, the tech giant is headquartered in Seattle, Washington. With more than 340 000 employees and 310 million active customer accounts worldwide, Amazon is the largest Internet-based retailer in the world by total sales ($135.99bn in 2016) and market capitalization ($480.8bnd – October 13th, 2017).

Amazon started as an online bookstore but quickly diversified to sell a wide variety of products, from furniture and electronics to streaming services. The company also produces consumer electronics (Kindle readers, Fire tablets, TV…) and is the world’s largest provider of cloud infrastructure services. The core idea of the Amazon strategy is that the digital commerce will radically reshape the market place. The company is constantly growing (see the chart representing the growth of revenue of Amazon) and penetrating news businesses, using its scale and technological advantage to outperform the competition. One the last example: the development of its online grocery delivery service: Amazon fresh. The three initiatives that drive Amazon today: Prime, the company’s rapidly proliferating $99-per-year membership program; an incursion into the physical world with brick-and-mortar stores (especially to develop its grocery activities); and a rethinking of logistics, represented by a new fulfilment center an hour outside Seattle that features high-tech robots working alongside human workers like a factory of the future.

About Whole Foods Market

Whole Foods Market is an American supermarket chain headquartered in Austin, Texas. With more than 91 000 employees and with sales of $15.8bn in 2016 it is one of the leading chain of grocery stores (US top 20).

Founded in 1980 by its CEO John Mackey, the company only features organic foods. The supermarket chain quickly grew, expanding its activities through US, Canada and UK and it merged in 2008 with Wild Oats Markets, another big player of the distribution of organic foods. In the recent years, the company has been losing millions of customers with the raise of the competition on the organic market by conventional and cheaper supermarket chains, especially Krager, raising their supply of organic food. Whole Foods Market’s sales fell by 2.4% in 2016 and was expected to fell by 2.5% in 2017, and the company has seen his shares fall by half since 2013.

John Mackey, was at the beginning of 2017 under pressure to sell his business from activist investors Jana Partners, which in April bought a 9 per cent stake then calling for management and strategic changes and raising the possibility of a sale. The 35-year-old company replaced in May its chairman, chief financial officer and several board members. The Amazon offer represented for Mackey, “an opportunity to maximize value for Whole Foods Market’s shareholders”

Deal Structure

According to the terms of the transaction, Amazon giant is buying the high-end grocer for $42 a share, valuing the company at $13.7 billion. Shares of the grocer were trading at $33.06 a share before the deal was announced, so the deal represents a 27% premium on its closing price. Whole Foods Market will continue to operate under its name, and Mackey will stay on as CEO of the brand.

The deal is funded through debt financing from Goldman Sachs and Bank of America Merrill Lynch, Amazon said. The debt will be broken into seven parts, ranging from three-year notes to 40-year notes.

After receiving the approval of the Whole Foods Market’s shareholders (on August 22, 2017) and of the US Federal Trade Commission (on August 23, 2017), the deal was closed on 26 August 2017.

Deal rationale

The deal will give Amazon, with Whole Foods’ portfolio of more than 450 stores, a much more significant bricks-and-mortar presence. The online retailer has been running its own grocery delivery program, Amazon Fresh, since 2007 and has also opened a handful of physical bookstores in the US during the past year. Amazon also said it would integrate Amazon Prime — the company’s membership service that includes free shipping — into Whole Foods’ point-of-sale system. Furthermore, Amazon will benefit from the strong credibility in food retail of the Whole Foods’ brand and will also acquires the strong knowledge of the grocer in the food supply chain management.

Amazon will extend the client basis of Whole Foods and it will also get the prices of Whole Foods, it’s main weakness until now, lower, buy investing a lot to cut the competition such as the e-commerce giant is used to do in businesses it conquers. Also, Amazon will bring its tech expertise to Whole Foods to reshape the business (especially with the app Prime) while all the others major retailers are late on this field.

Therefor the grocery sector faces the spectre of a price war in the months to come, and even more with the recent opening of German discounters Aldi and Lidl in the US.

Market reaction

On June 16, 2017, the day after the announcement of the deal, Walmart, the world’s biggest retailer with a $236bn market value, dropped 4.7 per cent to $75.24. Kroger had 9.2 per cent wiped from its share price to $22.29.

On August 25, 2017, after Amazon announced a range of price cuts, shares in Kroger fell 8.1 per cent to $21.10. Walmart, declined 2 per cent to $78.34.

Advisor

Goldman Sachs advised Amazon and Evercore advised Whole Foods Market

Sources: 

Business Insider

Financial Times

Credit Photo:

Adage