Why Activist Investors Will Face Major Hurdles at Whole Foods

Print Email

Several key issues were brought up, some of which may sound familiar if you have followed activists for very long. These comments are from JANA and the reporting persons in the filing, noted as follows.

JANA believes Whole Foods shares are undervalued and represent an attractive investment opportunity, and they have experience analyzing and investing in the grocery sector and more broadly across the food and retail sectors.

JANA intends to have discussions with the Whole Foods board of directors and management over underperformance, changing the board and senior management (and addressing governance) optimizing real estate and capital allocation strategies (including the “365” small store format and opportunities to improve returns on invested capital), and to seek opportunities to improve performance in brand development and addressing core operating deficiencies (customer loyalty and analytics, category management and analytics, technology and digital capabilities).

Some of the other items were noted as follows:

  • Procurement and buying practices
  • Pricing strategies, value proposition communication, and online offerings
  • Improving in-store execution
  • Private label program strategy and management
  • Assessing broader cost structure and operating opportunities
  • And re-engineering grocery procurement and distribution strategy

Perhaps the key issue here is that this could lead to a sale. JANA noted that it plans on initiating a review of strategic alternatives, particularly in light of an apparent unwillingness to engage in discussions with third parties regarding such alternatives.

JANA further noted that it is also prepared to nominate individuals for board seats and to participate in the solicit proxies in support of such individuals.

The aggregate voting power for JANA Partners is 26,314,367 shares, including options to purchase 3,535,000 shares. This represents roughly 8.3% of the shares outstanding. These shares were acquired by JANA at an aggregate purchase price of approximately $705.6 million, with investment funds in accounts managed by JANA and margin borrowings. When you include reporting persons, the total aggregate was shown to be 27,882,035 shares if you include the options to purchase 3,535,000 shares. That is an aggregate purchase price of roughly $721.2 million. The filing noted the following holders:

  • Mr. Murphy used a total of approximately $44 million in the aggregate to acquire the 1,457,078 Shares reported herein as beneficially owned by him.
  • Ms. Dietz used a total of approximately $3.1 million in the aggregate to acquire the 101,000 Shares reported herein as beneficially owned by her.
  • Mr. Dickson used a total of approximately $155 thousand in the aggregate to acquire the 5,275 Shares reported herein as beneficially owned by him.
  • Ms. Adler used a total of approximately $100 thousand in the aggregate to acquire the 3,455 Shares reported herein as beneficially owned by her.
  • Mr. Bittman used a total of approximately $25 thousand in the aggregate to acquire the 860 Shares reported herein as beneficially owned by him.

Whole Foods shares did react positively to the news that JANA has partnered up with industry powerhouses to shake things up. The stock was up 10% at $34.15 in the final minutes before Monday’s close. The 26 million shares that traded hands represented more than five times normal trading volume. Whole Foods has a 52-week trading range of $27.67 to $35.58 — down sharply from a high of $65 or so in 2013. The consensus analyst price target was last seen at $28.38.

Getting an activist investor involved in a company like Whole Foods might be what the company needs to try to fix some of its missteps. It might also be a no-brainer for a former high-flyer to get some pressure to boost shareholder interest again. Then again, you have seen just a portion of the risks and hurdles that need to be overcome before an activist investor can force Whole Foods back on track for investors.