No one should think that Amazon’s (AMZN) innovative play for Whole Foods is a done deal. News of Amazon’s acquisition of the grocer (WFM) for $13.4bn shocked up the grocery industry and sent big box retailers' stocks tumbling. The long-delayed discussion on how online retail could transform traditional grocery is about to be realised. Short sellers had already targeted the Food & Staples Retail sector due to eroding business models and compressed profit margins. The sector’s depressed stock prices has made it a tempting target for visionary companies.
News of Amazon invading the supermarket space, moving from distant competitor into an immediate threat, will force other companies to react. The potential of the acquisition can be debated, yet it’s hard to argue that with Amazon's IT and distribution expertise, there will be further downward pressure on prices and profit margin. This aggressive strategy is unlikely to go unchallenged. Amazon agreed to pay $42 per share, representing a 27% premium above prior day close, under the acquisition agreement. Yet by Monday, the price was already at $43.22 indicating that investors expect other bidders to enter the fray.
While it’s unlikely that any company has the deep pockets to outbid a determined Amazon with a total stock market value of $475 billion, we could see an effort to make the acquisition more costly. Rival bids could come from Kroger Co, Target, Albertson and most likely Walmart. There is also the chance that large private equity firms could enter the fray. Given the Whole Foods board’s fiduciary duty to shareholders, it must consider any realistic takeover offer so offers will get reflected in the stock price (break-up fee would cost Whole Foods $400m). We would go long WFM with a target price of $48, with downside scenario $42 (Amazon’s bid price).
By Peter Rosenstreich