(NASDAQ: AMZN) — market cap as of 15/09/2017: $476.64bn


On June 16, 2017, it was announced that Inc. (“Amazon”) had reached a definitive agreement to acquire Whole Foods Market Inc. (“Whole Foods”), for a total cash consideration of approximately $13.7bn, including net debt.

This is the latest deal in a sector that has been consolidating in the face of increasing customer base and e-commerce momentum, whereby Amazon seeks to grow externally to establish its industry dominance. Amazon’s global footprint, its low-price policy combined with the high-income customer base of Whole Foods will surely contribute to the integrated entity’s success.


Headquartered in Seattle (USA), Amazon is the world’s largest online shopping retailer, operating in 189 countries and employing c. 341,400 people across 5 continents. The company, listed on the NASDAQ, was founded in 1994 by Jeff Bezos, who currently is CEO and President.

The online retailer behemoth aims at being the world’s most “customer-centric company”, offering its products through different platforms better and faster than competitors. The corporation delivers innovation across its multiple businesses, ranging from drone delivery system to manufacturing of electronic devices. Among the recent innovations introduced, it is worth mentioning “Amazon Prime Now” – a service which allows customers to buy products and have them available in one hour.

Amazon’s strategy has been characterized by a continuous focus on external growth, running more than 50 acquisitions in the last ten years. This approach, combined with consistent R&D efforts to seize new opportunities, has delivered outstanding results. In FY2016, Amazon reported c. $135.99bn in revenues – 27.08% above the prior year’s results – and it is expected to close FY2017 with $174.32bn. Likewise, reported net income for FY2016 was $2.37bn (vs. $596m in FY2015).

About Whole Foods Market

Headquartered in Austin, Texas (USA), Whole Foods is an American supermarket chain exclusively featuring organic and natural food, employing 87,000 employees across 470 supermarkets in North America, and the United Kingdom. The firm completed its IPO in January 1992 and was formerly listed on the NASDAQ Global Select Market under the symbol “WFM”. It was co-founded in 1980 by John Mackey, who is the current CEO.

In FY2016, net revenue was $15.72bn, up 2% vs. FY2015 due to an improvement in the firm basket size. This growth in revenues does not offset the fact that the Company has one of the largest amount of fixed industry costs in terms of SG&A, which led to a declining EPS.

Whole Foods’ net income decreased by 5% to $507m in FY2015 due to the presence of interest expense primarily related to the company’s $1bn offering of 5.2% senior notes. The current debt-to-equity ratio of 0.3x is below the industry average. Net operating cash flow increased to $277 million or 46.56% vs. Q2 2016. Despite the mixed results of the gross profit margin, Whole Foods’ net profit margin of 2.84% stand out compared to the industry average.

Industry Overview

The retail industry is evolving in such a way to create opportunities for some retailers, especially those based on e-commerce, and issues for others. Technology is reshaping demand and the retail business model is constantly evolving to meet the newly arising needs of customers.

This year has been identified by many as the year of retail bankruptcies with many traditional retailers such as JCPenney, Michael Kors, and Under Armour announcing the closure of a considerable number of stores. The environment for traditional retailers is troubled and analysts do not expect a rosy future.

Experts suggest that the future of retail is online. The number of online customers grew by almost 20m between 2015 and 2016. The amount of money spent online per customer has also increased. E-commerce is steadily growing thanks to large participants such as Amazon and Alibaba. In 2016 the online retail sector experienced a growth rate of 7x vs. the traditional retail sector and this divergence in growth figures is expected to increase. In 2017, online sales growth is projected to be c. 8-12%, while the retail industry as a whole will experience a much lower growth rate of c. 3.7- 4.2%.

Considering the accessibility of the market and its premises, the threat of new entrants is high. The online version of the retail sector presents much less barriers to new players than the old-style retail sector did. As a consequence, many new players are eager to take their slice in this growing pie. Capital requirements are not elevated and less amount of infrastructure is required. The ingredients required to be an online retailer do not represent a barrier. Indeed, it is enough to make an agreement with suppliers, open a website for the display of products and ensure an online payment procedure.

Although the number of competitors in the industry is considerable, some of them have clearly established dominance, accounting for a large part of market shares. For instance, Amazon makes up 34% of US online sales. The figure is expected to reach 50% by 2021, also thanks to the popularity of Prime membership and its marketplaces. Alibaba, on the other hand, has captured 50% of the Chinese online market.

The latest M&A deals show that the sector is directed towards concentration. However, there is a possibility that prospective growth as well as the aforementioned low level of barriers will increase the number of participants in the industry and reduce the market share of titans.

Pre-Announcement Negotiations

The first contacts between and Whole Foods started with Whole Foods executives deciding to call the e-commerce giant after media reported Amazon had once considered buying their company.

Amazon’s first offer of $41 a share on May 23, was countered by Whole Foods’s request of $45 a share on May 30. According to the filing, Amazon had been considering whether to respond to Whole Food’s $45 counter proposal at all or to pursue other opportunities.

During transaction talks, Whole Foods received 6 other expressions of interest, one of which would have valued Whole Foods at $35-$40 a share. However, Amazon was “not willing to engage in a multi-party sale process” and asked Whole Foods not to approach other bidders during talks as well as to keep total secrecy.

On June 1, Amazon made its best and final offer of $42 per share for the acquisition of Whole Foods.

Deal structure

On June 16, 2017, it was announced that reached a definitive agreement to acquire Whole Foods, for a total cash consideration of c. $13.7bn, net debt included. Amazon offered Whole Foods $42 per share in cash, representing a 27% bid premium over Whole Foods closing share price of $33.1 on June 15, the last trading day prior to the announcement. Additionally, the offer price represented a rumour bid premium of 48.9% over Whole Foods’ closing share price of $28.2 on November 3, 2016, the last trading day prior to the initial rumour.

Amazon’s offer implied an EV/EBITDA multiple of about 10.5x, just slightly above the 9.9x average take-out multiple in the retail sector over the past 11 years. The price looks appropriate, given Amazon’s ambitions in the grocery sectors. In fact, several analysts expected the final price to be higher, sending Whole Foods’ shares above $42 in the days following the announcement.

On August 23, Whole Foods’s shareholders approved the acquisition by, whilst the board of directors had previously approved the transaction. On the same day, it was also announced that the US Federal Trade Commission approved the transaction. The transaction was completed on August 28, 2017, following regulatory clearance from the Canadian Competition Act and the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

Deal rationale

There are several key reasons behind Amazon decision to make the acquisition.

The company dominates online retail sales in the United States and boasts a fast-growing global presence. However, in spite of its efforts, the company has failed to make a dent in the estimated $674bn US market for edible groceries, with a mere estimated 1.1% market share in 2016. The logistics behind the delivery of fresh products is far more complex than that of more durable goods like books, at which the company had traditionally excelled. Groceries must be delivered quickly and kept cold during the delivery. Furthermore, many consumers still prefer to personally select the product, instead of delegating the task to someone else. A part this last challenge, Whole Foods’ 460+ stores could prove useful in facilitating the delivery process by becoming an integral part of Amazon’s distribution system. Amazon could also tap into Whole Foods’ extensive network of suppliers to strengthen its grocery offering.

In addition, Amazon will have the opportunity to leverage a key distinctive feature of Whole Foods’ stores: their presence in predominantly high-income areas. The company will be able to eventually start selling its private-label products and boost its Prime membership, thus bringing new high-net-worth customers onto its ecosystem. Furthermore, Morgan Stanley’s analysts estimated that 38% of Whole Foods customers, or about 5 million households, are not Amazon Prime subscribers and expect Amazon to convert half of these shoppers in less than 2 years.

Third, Amazon can increase the popularity of Whole Foods’ physical stores by employing the same strategy that has contributed to making it the online retail juggernaut it is today: slashing prices. Even in the highly competitive retail business, Amazon has some leeway to cut prices. Whole Foods’ operating margin stands at 5.5%, compared to Amazon’s 3%. Furthermore, the Seattle company can employ the sophisticated algorithms it has developed through its online experience to increase the efficiency of the newly acquired stores. Conversely, the company will also be able to tap into Whole Foods’ data to learn more about consumer preferences when it comes to groceries, in an attempt to bolster its own efforts to sell them online. Amazon unsurprisingly wasted no time in this regard, and on the day the deal closed it slashed prices at Whole Foods stores by as much as 43% on some items.

From Whole Foods’ perspective, the deal provides a welcome relief considering the increasing pressure received by the CEO to sell the business, since activist investor Jana Partners purchased a 9% stake in April of this year. After years of stagnant sales (1.7% YoY growth this year), and no apparent turnaround in sight, the CEO was able to sell the business at a considerable premium. Going forward, Whole Foods will benefit from Amazon’s technological expertise, its global footprint and its uniquely cheap access to external capital as well as its capability in delivering growth.

Market reaction

On the day of the announcement, Whole Foods’ shares rose 27% to $41.98, just below Amazon’s offer. In the following days, the price hovered occasionally above the $42 threshold, on speculation that either other suitors could start a bidding war, or that Whole Foods would demand a higher price.

Amazon’s shares rose about 3%, reflecting shareholders’ implicit approval of the deal. Interestingly, by being up $32 per share and having some 478m shares outstanding, Amazon’s market cap appreciated by about $15.6bn – more than what it had to spend to purchase its target.

Unlike the two parties to the deal, shares of other retailers were hammered. Walmart, the world’s largest retailer by revenues lost 5% on news of the deal. Other North American retailers were even more affected. Kroger shed 9%, Sprouts Farmers Markets dropped 6% and Target plunged as low as 10%, before paring its losses and closing the day down 5% – and the market cap of many of these retailers has continued to decrease since then. Investors fear Amazon could do to retailers what it did to bookstores several years ago. Its financial wherewithal and its technological superiority cast a dark shadow on an industry widely considered ripe for disruption.
It seems that the market has already expressed its opinion on who are the winners and losers.

Financial Advisors

Evercore Partners provided financial advisory to Whole Foods, while Goldman Sachs served as Amazon’s advisor.


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