Here’s a deal that will have people buzzing, and could at some point reverberate through media and advertising: E-retail giant Amazon says this morning that it has agreed to pay $13.7 billion in cash for Whole Foods Market.
Whole Foods will keep its brand name. CEO John Mackey will remain at the helm at the company headquarters in Austin. Whole Foods and Amazon expect the deal to close by the end of this year.
The grocery chain has more than 460 stores in the United States, Canada, and the United Kingdom. About 450 of the stores are spread across 48 states.
Whole Foods “has a large store footprint … but also one that is fragmented, which means that there could be reasonable shipping-to-home logistics opportunities here,” RBC Capital Markets’ Mark Mahaney says.
Amazon CEO Jeff Bezos says that “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.”
Mackey says the union with Amazon “presents an opportunity to maximize value for Whole Foods Market’s shareholders, while at the same time extending our mission and bringing the highest quality, experience, convenience and innovation to our customers.”
Amazon agreed to pay $42 a share, a 27% premium over yesterday’s closing price for Whole Foods’ stock. The grocery chain opened up 27% this morning, suggesting that investors are confident that it will be sold.
Amazon’s up nearly 3% after announcing what would be, by far, the biggest acquisition it has ever made.
Whole Foods will have to pay a $400 million termination fee if it scraps the deal.
Amazon already offers grocery delivery services in 21 U.S. cities (as well as London and Tokyo) with 15 fulfillment centers. And it has said that it wants to grow in the business.
Consumers spent nearly $900 billion on food in 2015.
Yesterday Nomura Instinet’s Anthony DiClemente called grocery “one of the largest and most under-penetrated markets for Amazon.”
Barclays analyst Karen Short wrote last month that there’s “no reason why [Amazon] shouldn’t be able to convert a significant percentage of its 45m US Prime members today into Fresh customers over the next decade.”
That expansion effort seemed to be especially threatening to upscale chains led by Whole Foods and Trader Joe’s.
And Whole Foods has been struggling to grow. Its shares have lost more than 40% of their value since mid-February 2015. Revenues improved about 2.2% in 2016 to $15.7 billion.
Activist investment firm Jana Partners, which owns 8% of Whole Foods, urged the company to find a buyer. Whole Foods reportedly had talked to Albertsons.
In an interview with Texas Monthly, published this week, Mackey said his chain was caught in a “morality play between conscious capitalism and greedy, short-term financial capitalism.”
He acknowledged that Whole Foods must “get better.”
But he added that those pressing for a sale “because they think they can make 40-or-50% in a short period of time” are “greedy bastards, and they’re putting a bunch of propaganda out there, trying to destroy my reputation and the reputation of Whole Foods, because it’s in their self-interest to do so.”
The deal has Amazon watchers wondering what the Whole Foods acquisition suggests about Bezos’ strategy — and perhaps other tech giants.
“Amazon is effectively saying that if retailers are going to tool themselves up with technology, then they will tool themselves up with a physical presence and high-street brand,” says Paul Cuatrecasas, CEO of London-based boutique investment bank Aquaa Partners. “It helps justify the belief that, seemingly all of the sudden, the larger tech giants will start buying up established companies, like banks and automotive manufacturers. The impact could be immense and generational.”
Investors see Amazon’s move as a threat to other grocery chains. Stocks reeling from the news in morning trading include Kroger (-13.7%), Costco (-6.7%), and Wal-Mart (-6.6%).