In­vestors ex­pect Ama­zon to face a ri­val of­fer for the strug­gling gro­cery chain.

Los Angeles Times - - BUSINESS - By James F. Peltz

Ama­’s plan to buy Whole Foods Mar­ket Inc. sparked an avalanche of dis­cus­sion about how the on­line re­tail gi­ant could trans­form the U.S. gro­cery in­dus­try in the years ahead.

But Ama­zon’s $13.7-bil­lion deal might not be the last word on the merger it­self.

Wall Street sig­naled Mon­day that it ex­pects a ri­val of­fer for Whole Foods to sur­face, and many in­dus­try and merger ex­perts agreed.

“Highly likely,” said Lloyd Greif, whose in­vest­ment firm Greif & Co. spe­cial­izes in merg­ers and ac­qui­si­tions but isn’t in­volved with Whole Foods. Ama­zon “didn’t put this out of reach for ev­ery­body else” in terms of price, he said.

Ama­zon agreed to pay $42 for each Whole Foods share un­der their agree­ment an­nounced Fri­day. But in trad­ing Mon­day, Whole Foods closed at $43.22 a share, up 54 cents on the day, in­di­cat­ing that in­vestors ex­pect a higher of­fer to ar­rive.

“We would not be sur­prised if there is a bid­ding war” for Whole Foods, the 465-store chain that fo­cuses on nat­u­ral and or­ganic gro­ceries, an­a­lyst Karen Short of Bar­clays Cap­i­tal Inc. said in a note to clients Fri­day.

But Short and oth­ers noted that even if Whole Foods gets an al­ter­na­tive of­fer, the other suitor will be hard-pressed to win a bid­ding war against Ama­zon, whose deep pock­ets in­clude hav­ing a to­tal stock mar­ket value of $475 bil­lion. Ama­zon’s stock closed Mon­day at $995.17 a share, up $7.46.

“Very few en­ti­ties could out­bid” Ama­zon, Short said.

None­the­less, she said “many will do any­thing to ei­ther make this ac­qui­si­tion more costly” for Ama­zon or to “pre­vent the as­set from land­ing in [Ama­zon’s] lap.” That’s be­cause Ama­zon poses such a com­pet­i­tive threat, es­pe­cially when it comes to putting down­ward pres­sure on prices and profit mar­gins.

Short and oth­ers sug­gested that other po­ten­tial bid­ders in­clude Kroger Co., the par­ent of the Ralphs and Food4Less su­per­mar­ket chains; Al­bert­sons, which also owns Vons and Pavil­ions; and re­tail gi­ant Wal­Mart Stores Inc., among oth­ers.

Whole Foods, Kroger, Al­bert­sons and Wal-Mart all de­clined to com­ment. Ama­zon did not re­spond to a re­quest for com­ment.

Whole Foods also might draw a ri­val of­fer from one or more large pri­vate eq­uity firms be­cause “there’s a tidal wave of money that’s slosh­ing around” in that in­dus­try, said Eric Schif­fer, chief ex­ec­u­tive of the Pa­tri­arch Or­ga­ni­za­tion, a pri­vate eq­uity firm that isn’t in­volved with Whole Foods.

Ama­zon’s $42-a-share of­fer amounted to a 27% pre­mium above where Whole Foods’ stock had closed the prior day, at $33.06.

But Whole Foods has strug­gled in re­cent years, and the $33.06 price was about half where Whole Foods stock was trad­ing at its peak in Oc­to­ber 2013. One prob­lem fac­ing the chain: Con­ven­tional su­per­mar­kets are stock­ing more nat­u­ral and or­ganic prod­ucts at lower prices than Whole Foods, drain­ing away some of its cus­tomers.

Re­gard­less, given the track record of how Ama­zon and its chief ex­ec­u­tive, Jeff Be­zos, have trans­formed other re­tail in­dus­tries, there’s likely to be con­cern among gro­cery ex­ec­u­tives about Ama­zon’s en­try into the mar­ket. That might re­sult in a ri­val of­fer for Whole Foods, an­a­lysts said.

“Any smart board rec­og­nizes it’s prob­a­bly smarter to try to pay more” for Whole Foods “to keep Be­zos out of this game,” Schif­fer said. “He could make some shock­ing changes that could be deadly to some of these [ex­ist­ing] brands.”

Ri­val su­per­mar­ket chains also would see Whole Foods as a strate­gic play in which they could ex­pand their cus­tomer base while trim­ming du­pli­cate dis­tri­bu­tion, pur­chas­ing and over­head costs, Short said, adding that the sav­ings could to­tal up to $600 mil­lion a year.

The Ama­zon deal was struck af­ter the com­pa­nies agreed that John Mackey would re­main Whole Foods’ CEO. That might not be the case if Whole Foods was bought by another gro­cery chain.

Whole Foods’ board, of course, has a fidu­ciary duty to its stock­hold­ers to con­sider any vi­able takeover of­fer.

As for Ama­zon’s cur­rent of­fer, “give Jeff [Be­zos] credit, he’s get­ting a great deal here,” Greif said.

Whole Foods is part of the “crème de la crème of the su­per­mar­ket in­dus­try” and is a “hand-in-glove fit” with the ed­u­cated, rel­a­tively af­flu­ent de­mo­graphic of Ama­zon cus­tomers who pay $99 a year for the site’s Prime mem­ber­ship that in­cludes free ship­ping, video stream­ing and other ser­vices, Greif said.

“Ul­ti­mately there’s no­body who can take it away if [Be­zos] re­ally wants it,” Greif said, “and I think he re­ally wants it.”

‘Any smart board rec­og­nizes it’s prob­a­bly smarter to try to pay more’ for Whole Foods to keep Ama­zon CEO Jeff Be­zos ‘out of this game.’ — Eric Schif­fer, chief ex­ec­u­tive of the Pa­tri­arch Or­ga­ni­za­tion, a pri­vate eq­uity firm that isn’t in­volved with Whole Foods

Wally Skalij Los An­ge­les Times

OTHER PO­TEN­TIAL BID­DERS for Whole Foods in­clude the par­ent of the Ralphs and Food4Less chains; Al­bert­sons, which owns Vons and Pavil­ions; and Wal-Mart Stores. Above, veg­eta­bles at a Ralphs store in L.A.

Mel Mel­con Los An­ge­les Times

AN AL­BERT­SONS SHOP­PER in Glen­dale in 2012. An al­ter­na­tive Whole Foods suitor would be hard-pressed to win a bid­ding war against Ama­zon, ex­perts say.

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