How Amazon Buyout of Whole Foods Challenges Wal-Mart

Whole Foods Market Inc. (NASDAQ: WFM) shares were halted in early trading Friday after some earth-shattering news hit the market. Inc. (NASDAQ: AMZN) is making an incredibly ambitious purchase and buying out the organic grocer. While this is shocking, it is no doubt Amazon’s brick-and-mortar challenge against the likes of Wal-Mart Stores Inc. (NYSE: WMT) and Kroger Co. (NYSE: KR).

Under the terms of the agreement, Amazon will acquire Whole Foods Market for $42 per share (a premium of 27% from the previous close) in an all-cash transaction valued at roughly $13.7 billion, including Whole Foods Market’s net debt. The transaction is still subject to shareholder approval, but the parties expect it to close in the second half of 2017.

Whole Foods Market will continue to operate stores under the Whole Foods Market brand and source from trusted vendors and partners around the world. John Mackey will remain as CEO of Whole Foods Market and its headquarters will stay in Austin, Texas.

Jeff Bezos, Amazon founder and CEO, commented:

Millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy. Whole Foods Market has been satisfying, delighting and nourishing customers for nearly four decades – they’re doing an amazing job and we want that to continue.

This deal breaks ground in a couple different areas. First this is the biggest acquisition Amazon has conducted ever (largest deal prior was about $1 billion), and then this is the biggest M&A grocery store deal ever in the United States.

On Thursday, Kroger reported its most recent quarterly results, which met expectations but guidance prompted an industrywide sell-off. The future of the industry already has been called in to question, namely if there are too many stores out there or if trends with millennials are leading away from buying groceries in stores.

Amazon seems to be solving both these problems by helping to consolidate the industry, and with its current model it could potentially ship groceries or even integrate with its Prime service.

Either way, this is a huge shock to Wal-Mart, Kroger and other grocers in the space.

In years past we have seen that Amazon is willing to take a loss for years at a time, and with this massive e-commerce firm backing Whole Foods there could be meaningful change within the Whole Foods model. Not to mention, acquiring Whole Foods will give Amazon access to Whole Foods brick-and-mortar infrastructure, which could prove to be beneficial, based on what Bezos has in mind.

Ironically, this buyout comes in the same week that Mackey called activist investors “greedy bastards” because Jana Partners was pushing management to sell the company. It seems they got what they wanted.

Shares of Whole Foods are currently halted and closed Thursday at $33.06, with a consensus analyst price target of $33.95 and a 52-week range of $27.67 to $38.29.

Amazon shares were trading up 3% at $995.15. The stock has a 52-week range of $682.12 to $1,016.50 and a consensus price target of $1,110.84.

Kroger shares were last seen down 14% at $21.12, with a 52-week range of $20.46 to $37.97 and a consensus price target of $32.50.

Wal-Mart traded down about 6% at $74.24. The stock has a consensus price target of $80.49 and a 52-week range of $65.28 to $80.47.

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