WASHINGTON: Amazon.com Inc said Friday it would buy US organic supermarket chain Whole Foods Market Inc for $13.7 billion, including debt, marking the internet retailer’s largest deal and biggest foray into the brick-and-mortar retail sector.
The deal sent shockwaves across the food distribution market, as Whole Foods’ peers and supermarket chains grappled with the prospect of having to compete with Amazon’s massive buying power and ability to sell goods at a lower cost.
Amazon will gain a footprint of 456 supermarket stores in North America and Britain with the acquisition of Whole Foods, boosting its delivery capacity and allowing it to compete directly with US chains such as Kroger Co and Albertsons LLC.
“Supermarkets will now have to contend with not only competition with each other and non-traditional grocers like Wal-Mart Stores Inc and Target Corp, but with a retailer like Amazon, which has the financial capacity to price aggressively,” said Mickey Chadha, vice president and senior credit officer at Moody’s Investors Service.
“We expect this transaction to further accelerate the consolidation within the supermarket space.”
Amazon has agreed to pay $42 per share in cash for Whole Foods, a 27% premium on the Austin, Texas-based grocer’s closing share price on Thursday. Whole Foods shares were trading just under that level in early trading on Friday, as investors saw negligible regulatory risk to the deal closing.
Amazon’s shares were up 3% at $994.45. Shares of Kroger, however, plunged 14% to $21.13, their lowest level in three years, on investor fears about the largest US supermarket operator’s competitive position. Other retail and food distribution-related stocks in the US and Europe, including Wal-Mart and Target, followed suit.
Whole Foods had been under pressure from activist hedge fund Jana Partners LLC prior to the announcement of Friday’s deal, prompting it to overhaul its board of directors.
“I think that this takes all of the pressure off Whole Foods and gives Whole Foods the opportunity to revitalise that business and, of course, it stems the criticism from all of these activist investors,” said Neil Saunders, managing director of GlobalData Retail in New York.
Excluding debt, the deal is valued at $13.39 billion. It implies a trailing 12-month price-to-earnings multiple for Whole Foods of 31 times, versus a 14.4 average for the S&P 500 Food Retail index. Amazon and Whole Foods expect to close the deal during the second half of 2017. The grocer will continue to operate stores under the Whole Foods Market brand and John Mackey will remain as its chief executive officer, the companies said. Whole Foods’ headquarters will still be in Austin.
Published in The Express Tribune, June 17th, 2017.
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