NEW YORK: Whole Foods Market Inc shares added to their gains on Monday after Amazon.com Inc announced plans last week to buy the upscale grocer, with investors betting that rivals could step in to create a bidding war.
Amazon shares also rose as Wall Street analysts lauded the proposed $42-per-share deal and bet that the company would prevail in any bidding battle.
Whole Foods shares rose 1.3 percent on Monday to close at $43.22 - adding to Friday's 29 percent rise and reflecting hopes the company might fetch a higher price. Amazon shares ended up 0.8 percent at $995.17.
“We thought Amazon was thrifty in its offer," said Charles Kantor, managing director at Neuberger Berman Investment Advisers LLC, which owns around 2.7 percent of Whole Foods shares and had pressured the company to take steps to improve its stock price.
Kantor noted that Amazon’s market cap gain roughly equaled 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.
Culpepper, who owns Kroger Co <KR.N> shares, said Kroger is the company that would be most likely improve Whole Foods’ efficiency, but that it would have difficulty matching Amazon’s cash offer.
Kroger shares climbed 1.6 percent to close at $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 $48 from $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 $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 that very few companies could outbid Amazon.
Amazon's offer of $13.7 billion, representing a multiple of 10 times earnings before interest, tax, depreciation and amortization, could possibly 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 <WMT.N> could have sufficiently deep pockets to make a counter bid and other grocery rivals such as Kroger or Albertsons Cos Inc <ABS.N> would have the motivation, he said.
Any of the big grocery chains that bid on Whole Foods would 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.
"Even if they did compete ... you'd have to look at the presence of (other grocery chains)," said Abbott, who argued that many Whole Foods stores are in close proximity to other grocery stores, which means antitrust enforcers might be satisfied there was adequate competition. - Reuters
Reuters also reported:
When Wal-Mart Stores Inc bought online retailer Jet.com for $3 billion last year, it marked a crucial moment - the world's largest brick-and-mortar retailer, after years of ceding e-commerce leadership to arch rival Amazon, intended to compete.
On Friday, Amazon.com Inc countered. With its $14 billion purchase of grocery chain Whole Foods Market Inc, the largest e-commerce company announced its intention to take on Wal-Mart in the brick-and-mortar world.
The two deals make it clear that the lines that divided traditional retail from e-commerce are disappearing and sector dominance will no longer be bound by e-commerce or brick-and-mortar, but by who is better at both.
Amazon's purchase of Whole Foods also brings disruption to the $700 billion U.S. grocery sector, a traditional area of retailing that stands on the precipice of a ferocious price war. German discounters Aldi and Lidl are battling Wal-Mart, which controls 22 percent of the U.S. grocery market, with each vowing to undercut whatever price the others offer.
The stakes are highest for Wal-Mart. Amazon's move aims at the heart of the Bentonville, Arkansas-based retail giant's business - groceries, which account for 56 percent of Wal-Mart's $486 billion in revenue for the year ending Jan. 31. With the deal, Whole Foods’ more than 460 stores become a test bed with which Amazon can learn how to compete with Wal-Mart’s 4,700 stores with a large grocery offering that are also within 10 miles (16 km) of 90 percent of the U.S. population.
Amazon is expected to lower Whole Foods' notoriously high prices, enabling it to pursue Wal-Mart's customers. The push comes as Wal-Mart is headed in the opposite direction - going after Amazon's higher-income shoppers with a recent string of acquisitions of online brands such as Moosejaw and Modcloth and on Friday, menswear e-tailer Bonobos.
Wal-Mart may be ready. In preparation for the grocery price war, Wal-Mart in recent months has cut grocery prices, improved fresh food and meat offerings, modernized shelving and lighting in its grocery aisles, and expanded its online grocery pickup service.
Marc Lore, the Jet.com founder who now runs Wal-Mart's e-commerce business after selling a startup to Amazon, told Reuters in an interview that Amazon's move does not change Wal-Mart's game plan. "We're playing offense," he said.
Wal-Mart is offering curbside pickup of online grocery purchases at 700 locations, with 300 more planned by year end. It also is testing same-day fresh and frozen home delivery from 10 of its stores. "We see an opportunity to do a lot more of that," Lore said.
Roger Davidson, who oversaw Wal-Mart's global food procurement and now is president of Oakton Advisory Group, said the deal will reduce Wal-Mart's brick-and-mortar advantage.
"I think this acquisition is a concern," he said.
Some industry observers say Amazon will find it difficult to use Whole Foods to pull away Wal-Mart shoppers because the two stores appeal to different customers.
But Michelle Grant, head of retailing at market research firm Euromonitor, said Amazon could use an obscure part of the Whole Foods portfolio - Whole Foods 365 - to lure Wal-Mart shoppers.
Whole Foods 365 offers private-label goods and lower prices than typical Whole Foods stores, and is targeted at younger, value-conscious shoppers. Amazon could provide the financial capital and tactical ability to build that into something big.
"That (Whole Foods 365) may become a big problem for Wal-Mart," Grant said.
Amazon, which reported $12.5 billion in cash and equivalents and a free cash flow of $10.2 billion in the year ended March 31, has plenty to spend. Wal-Mart reported $6.9 billion in cash and equivalents and $20.9 billion in free cash flow at its year ended Jan. 31.
Brittain Ladd, a former senior manager at Amazon who worked on its brick-and-mortar strategy, said Amazon will use Whole Foods to test concepts for the grocery store of the future.
Ladd, who left Amazon in March, said Amazon will seek to eliminate checkout lines by using technology that automatically scans goods as customers add them to their shopping carts. It will select merchandise based on Amazon's vaunted customer data, and potentially expects the use of technology to change prices during the course of a day.
Amazon declined comment on competition with Walmart but spokesman Drew Herdener said in a statement the company has no plans to cut jobs or use technology in development at its Seattle Amazon Go store to automate jobs of cashiers.
Ladd, who helped with AmazonFresh's global expansion and now is a supply chain consultant, said an Amazon-owned Whole Foods also likely will offer in-car pickup of online purchases, and home delivery from Whole Foods stores, add pharmacies and showcase Amazon devices inside the stores.
"Amazon will reduce prices and change the assortment of products carried in Whole Foods stores to attract a larger customer base," said Ladd. "Kroger and Wal-Mart will be impacted as their customers will defect to Amazon." - Reuters