Whole Foods M&A Rumors: Reality Check, Weekend Food For Thought (WFM, KKR, KR, SWY, TFM)

If you have ever seen a private equity wish list if companies, Whole Foods Market, Inc. (NASDAQ: WFM) would be on it.  The stores are sleek, the products are at a premium, and its customers seem to be somewhat immune to the woes of the rest of the world.  The stores also generate far better profit margins than traditional grocers with the paltry 1% to 2%.  So, this week brought up rumors and ‘reports’ that Whole Foods could be a private equity takeover target.

We do want to quantify that a single firm or a private equity group can buy almost anything if it can get financing for it.  The valuations don’t always make sense on the surface.  The problem is that Whole Foods trades at such a premium today that most private equity firms with more than horse-sense would instantly determine that acquiring this trophy company would come at too high of a price.

For a private equity buyer to own a company, the goal is to ultimately resell the company at a much higher price down the road.  And at the time the deal is closed, a common move is to leverage the company up with debt and then to pay out a bulk of the cash on the books as a dividend to the buyers to instantly recoup 10% to 30% of the investment.  Even if it takes a decade to completely exit the transaction, at least the returns up front and the return of capital along the way can justify the exercise.

It isn’t like private equity investors are exactly eager to make 2.1% in 10-year Treasury notes and it isn’t exactly as if they have made stellar returns in the stock market over the last decade under Warren Buffett’s buy and hold forever strategy.

It was the Daily Mail out of the U.K. that first floated the rumor. To say that we are skeptical of a British media outlet scooping this one, particularly the Daily Mail, would be an understatement.  It noted that the premium and organic grocer could be under the watchful eyes of Kohlberg Kravis Roberts & Co. (NYSE: KKR) and Bain for somewhere around $90.00 per share.  Shares are currently around $59.00 and the 52-week trading range is $34.04 to $68.00.  The market cap today is about $10.4 billion

Thomson Reuters has estimates for Whole Foods’ fiscal September 2011 of $1.92 EPS and $10.12 billion in sales and estimates for fiscal September 2012 of $2.25 and $11.52 billion in sales.  Whole Foods trades at just over 30-times expected earnings and trades at close to 1-times expected revenues.  If you count Whole Foods as a grocery store, it is just too expensive to buy for a private equity firm even at today’s prices.  If you throw up a magical 50% premium to that $90.00 level, then KKR and Bain’s rumored price would be at about 45 year’s worth of earnings and about 1.5-times revenues.