Whole Foods shares rise in bidding war speculation

Charles Kantor, managing director at Neuberger Berman Investment Advisers LLC, which owns around 2.7 per cent of Whole Foods shares and had pressured the company to take steps to improve its stock price.

Kantor noted Amazon’s market cap gain roughly equalled the amount the company is paying for Whole Foods.

“I think there’s the argument that Amazon acquired Whole Foods for free,” he said. “The reaction of shareholders suggests that Amazon has left themselves lots of room to pay more for this strategic asset.”

Some investors suspected other companies were weighing a rival bid.

“Every grocery store out there now is having a conversation about how much they can afford to spend to keep Amazon out of the space,” said Brian Culpepper, a portfolio manager at James Advantage funds. Amazon.com’s offer of US$13.7 billion to buy Whole Foods, representing a multiple of 10 times earnings before interest, tax, depreciation and amortization, could possibly be raised to 11 or 12 times.

Culpepper, who owns Kroger Co shares, said Kroger is the company that would be most likely to improve Whole Foods’ efficiency, but that it would have difficulty matching Amazon’s cash offer.

Kroger shares climbed 1.6 per cent to close at US$22.64 on Monday.

“Kroger would have to pay in stock, and their stock has been hurting,” giving them less leverage to get into a protracted bidding war with Amazon, Culpepper said.

Barclays analyst Karen Short raised her Whole Foods price target to US$48 from US$38 and upgraded the stock to overweight from equal-weight, citing the possibility of counterbids.

“Many will do anything to either make this acquisition more costly for Amazon, or prevent the asset from landing in Amazon’s lap,” Short wrote in a note to clients.

A US$48-a-share price tag would be more than reasonable for a fellow retailer that could eliminate overhead at Whole Foods, Short said, while adding very few companies could outbid Amazon.

Amazon’s offer of US$13.7 billion, representing a multiple of 10 times earnings before interest, tax, depreciation and amortization, could be raised to 11 or 12 times, according to Kevin Dreyer, co-chief investment officer at Gabelli Funds, which holds Whole Foods shares.

“Fourteen billion is a big number but it’s not a number where there’s no other buyer,” said Dreyer. “Others could certainly look at this and sharpen their pencils.”

Wal-Mart Stores Inc could have sufficiently deep pockets to make a counter bid and other grocery rivals such as Kroger or Albertsons Cos Inc would have the motivation, he said.

Any of the big grocery chains could likely win antitrust approval to buy the premium grocery chain, according to three antitrust experts.

Any buyer of Whole Foods would likely argue that it was not in the same market, said Alden Abbott, an antitrust expert with the Heritage Foundation.