Whole Foods Makes
Offer for a Smaller Rival
ANDREW MARTIN / New York Times 22feb2007
[More on Whole Foods]
"Who has done more good for the planet: Mother Teresa or Bill Gates?"
— John Mackey, CEO of Whole Foods, the nation's largest non-union food retailer after Wal-Mart.
John Mackey, 50, hardly looks like a CEO, doesn't act much like a CEO, and doesn't talk like a CEO.
source: Fortune 15sep2003
Stung by competition and investor expectations, Whole Foods Market, the natural-foods grocer, was expected to announce another quarter of rather mundane earnings yesterday, at least by the standards of a company that has experienced more than a decade of breakneck growth.
But the chairman and chief executive, John P. Mackey, has always done things a bit differently, and yesterday he surprised investors by announcing a proposed merger with Wild Oats Markets, a similar though much smaller chain.
Whole Foods would pay $565 million, or $18.50 a share, for Wild Oats, a 23 percent premium over the average share price the last month. The company would also assume $106 million of debt.
Shares of Whole Foods jumped as much as $2.24 in after-hours trading to as high as $47.94
The demand of natural foods has increased sharply in recent years as consumers have tried to eat healthier, and competition has grown as larger retailers like Wal-Mart and Target have aggressively added organic products. At the same time, new competitors like Trader Joe’s have offered the products at lower prices.
Mr. Mackey — noting that Whole Foods has made 18 previous acquisitions, including Fresh Fields and Bread & Circus — said that the companies would save money by eliminating corporate duplication and that Whole Foods would gain access to markets where it is now weak, particularly the Pacific Northwest, the Rocky Mountain region and Florida.
Wild Oats, though, is the biggest acquisition yet for Whole Foods. Started in Boulder, Colo., in 1987, it has 110 stores in 24 states and in British Columbia and $1.2 billion in annual sales. By contrast, Whole Foods, which was started in 1980 in Austin, Tex., has 193 stores in the United States, Canada and Britain and had sales of $5.6 billion in 2006.
“We think we are going to have a very positive impact on Wild Oats, and we think they will have a positive impact on Whole Foods,” Mr. Mackey said. “We need each other.”
Whole Foods had considered acquiring Wild Oats about six years ago, he said, but decided against it. In the interim, Mr. Mackey said the company had become a much more formidable competitor, opening several large stores.
Mr. Mackey said he decided to approach Wild Oats again because it seemed that the smaller rival did not have a clear direction after its chief executive and chief financial officer left last year. Whole Foods will refurbish some Wild Oats stores before renaming them.
Some of Wild Oats’ smaller stores might eventually be closed while others might become larger Whole Food stores, he said, noting that such a plan would carry less risk than opening large stores in new markets.
The chief executive of Wild Oats, Gregory Mays, said he had received Mr. Mackey’s call about a proposed merger in early January. Since the two stores were the leaders in the natural and organic marketplace, he said he had considered it a “perfect marriage” because the combined company could focus on larger rivals.
“It’s just a natural fit for both of us,” said Mr. Mays, who took over as chief executive in October. “The stakes are changing. Here you had two front-runners, everybody — Safeway, Kroger, Wal-Mart — everybody is entering because this space is growing exponentially.”
Mr. Mackey singled out Trader Joe’s as a strong competitor.
One reason that Whole Foods sees Trader Joe’s as a formidable rival is because the two grocers already serve many of the same higher-income consumers — the same customers who Wal-Mart has hoped to attract by adding organic foods.
From 1998 to 2005, the organic food industry in the United States grew 15 percent to 21 percent each year, according to the Organic Trade Association. In 2005, sales of organic food was $13.8 billion.
But the market for natural products is much broader and harder to define. According to The Natural Foods Merchandiser, natural and organic product sales in the United States grew 9.1 percent in 2005, with more than $51 billion in sales.
The Whole Foods announcement was made late yesterday afternoon after financial markets had closed. Several analysts applauded the deal, even if they were surprised by its timing.
“I didn’t expect it all,” said David Gardner, a founder of the Motley Fool and a longtime supporter of Whole Foods stock. “This has been core to its growth strategy. I think today’s move is therefore consistent with how Whole Foods has created value for shareholders for much of its history, and I do believe Wild Oats will create value for WFMI shareholders.”
Mark Husson, an analyst with HSBC, said he was surprised by the merger announcement because Whole Foods has always looked down its nose at Wild Oats. But he said the deal made sense, and he compared it to two knights who decide to stop fighting each other so they can protect the castle against bigger competitors.
“Clearly if they are not fighting each other they have a much better chance of fighting the competition,” Mr. Husson said. “It’s a sensible deal, a defensive deal in way.”
But while the merger may boost Whole Foods’ stock in the short run, he said the company still must address the slowdown in its business. If not, he said, there could be increasing pressure for Whole Foods to whittle its costs.
“When things are going well, you can be really generous,” Mr. Husson said.
The announcement of the proposed merger largely overshadowed Whole Foods’ quarterly earnings, which were below analysts’ expectations.
Whole Foods’ net income for the quarter was $53.8 million, or 38 cents a share, compared with $58.3 million, or 40 cents a share, in the quarter a year ago.
Sales at stores open at least a year, or same-store sales, rose 7 percent, compared with 13 percent a year ago. Whole Foods’ revenue increased 12 percent, to $1.9 billion.
Whole Foods’ stock has tumbled by nearly 40 percent in the last year because of increased competition and the chain’s inability to keep pace with its lofty financial goals.
Whole Foods defined the market for natural and organic foods, but nearly every major retailer has scrambled to replicate Whole Foods’ success, by making their produce more aesthetically pleasing or by offering more organic and natural products.
“Whole Foods is a very strong company facing a mature market and better competition, and that will require an even better strategy than they’ve had in the past,” said Darrell Rigby, head of global retail practice at Bain & Company, a consulting firm.
“In order to continue growing, you can’t just appeal to the upscale consumers that converted to Whole Foods long ago,” he added. “You have to attract new customers as well.”
Smarting from its “Whole Paycheck” image, Whole Foods has responded by reducing prices and by opening huge new stores that offer prepared foods and in-store dining.
Yesterday, Mr. Mackey expressed frustration with Wall Street expectations, and he urged shareholders to take the long view on his company.
“I don’t want to apologize for 7 percent comps,” he said, referring to same-store results. “Are any other food retailers close to that? No.”
Mr. Mackey also emphasized that it would take time before investors see financial benefits from the merger with Wild Oats, which he hopes to close by April.
“We’re not going to work miracles here the first month after we take control of their stores,” he said. “A year from now, we should be seeing very good progress.”
Whole Foods to Acquire Organic
Wild Oats Markets
Wall Street Journal 21feb2007
Whole Foods Market Inc. announced an agreement to acquire Wild Oats Markets for about $565 million, greatly expanding the organic-grocery chain's footprint amid stiffer competition.
The move comes as grocery chains such as Safeway and Kroger have been elbowing into Whole Foods' bread-and-butter organic-food business. Wal-Mart Stores has also beefed up its organic offerings. That's boosting some food prices as organic farmers charge more for products such as apples and lettuce.
Under the terms of the deal, Whole Foods, of Austin, Texas, is offering $18.50 a share in cash, which the companies said was a 23% premium to Wild Oats' one-month average closing price. Whole Foods will also assume Wild Oats' existing net debt, which was about $106 million as of Sept. 30.
Whole Foods said it expects to recognize "significant synergies" through cost reductions in overhead, greater purchasing power, increased use of support facilities and new talent.
Wild Oats Markets has annual sales of about $1.2 billion. The company was founded in Boulder, Colo., in 1987 and currently operates 110 stores in 24 states and British Columbia. Its four store brands are Wild Oats Marketplace, Henry's Farmers Market in Southern California, Sun Harvest in Texas and Capers Community Market in British Columbia.
Whole Foods had sales of $5.6 billion in fiscal 2006 and currently has 191 stores in the U.S., Canada and the United Kingdom.
John Mackey, chairman and chief executive of Whole Foods Market, said the acquisition "is a great geographical fit as all of our 11 operating regions will gain stores and three of our smallest regions -- our Pacific Northwest, Rocky Mountain and Florida regions -- will gain critical mass." He said the company "will also gain immediate access into a significant number of new markets."
The companies said Yucaipa Cos., Wild Oats Markets' largest shareholder, has committed to tendering its shares. Whole Foods said it currently expects to close the transaction in April.