Grocery Stocks Crash After Amazon Buys Whole Foods

Tyler Durden's picture

Whole Foods stock was halted for 'news pending'... and now we have the answer - Amazon to acquire Whole Foods Market for $42/share in an all-cash transaction valued at ~$13.7b, including Whole Foods Market’s net debt.

With 9% of the float short this stock, we can only imagine the squeeze onm this 27% premium over last night's close.

Full Statement:

Amazon (NASDAQ:AMZN) and Whole Foods Market, Inc. (NASDAQ:WFM) today announced that they have entered into a definitive merger agreement under which Amazon will acquire Whole Foods Market for $42 per share in an all-cash transaction valued at approximately $13.7 billion, including Whole Foods Market’s net debt.

“Millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy,” said Jeff Bezos, Amazon founder and CEO.

 

“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 partnership 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,” said John Mackey, Whole Foods Market co-founder and CEO.

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 Whole Foods Market’s headquarters will stay in Austin, Texas.

Completion of the transaction is subject to approval by Whole Foods Market's shareholders, regulatory approvals and other customary closing conditions. The parties expect to close the transaction during the second half of 2017.

The purchase of Whole Foods is Amazon's largest acqusition in history:

Amazon expects to finance the acquisition with debt.

  • Amazon enters into commitment letter for 364-day senior unsecured bridge term loan facility in an aggregate principal amount of up to $13.7 billion.
  • Expects to finance deal with debt financing, which may include senior unsecured notes issued in capital markets transactions, term loans, bridge loans, or any combination thereof, together with cash on hand, co says in a filing
  • Goldman Sachs, BofA-Merrill Lynch to lead debt financing

Amazon stock is up 3% on the news...

 

The sellside was delighted: here is Credit Suisse:

We view this acquisition as an offensive TAM-expansion move to accelerate its progress in the largest consumer spend category. In other words, Amazon is paying roughly 3% of its enterprise value for an improved position in an addressable segment that amounts to ~$1.6t according to the US Dept. of Agriculture’s ERS, especially as progress at Amazon Fresh (in terms of regional rollout) has been admittedly slower than we expected. The knock-on strategic benefit over the longer term should be 1) higher consumer engagement as the frequency of shopping for food and groceries should be greater versus the other verticals, 2) improved consumer selection in the category, 3) likely better bargaining terms with some of its current groceries/fresh produce suppliers, and as an ancillary benefit (while not as meaningful for the near to medium term) a 4) physical store footprint for Amazon-branded merchandise both hardware and softlines.

Others, such as Opennheimer, expect overbids, and OpCo raised its PT from $40 to $45 just on that.

Some context on the relative size.

 

And Kroger, Wal-Mart, Sprouts, and Target are plunging... (WMT -4%, TGT -5.5%, SFM -7.6%, KR -12%)

 

And European supermarkets are getting hammered -

  • *AHOLD, CARREFOUR, TESCO FALL TO LOWS ON AMAZON/WHOLE FOODS DEAL
  • *AHOLD DELHAIZE SLUMPS 6.8% IN AMSTERDAM ON AMAZON NEWS

With good reason probably. Grocery margin are 1-2% at best, and if Amazon can truly create smart stores with no check outs and cut employees in half they can kill regular supermarkets...

As Bloomberg's Gadfly recently opined, Amazon wil kill your local grocer...

Amazon's done it to books. And electronics. And clothing. Now it wants to rule the grocery aisles.

 

But Amazon still has a ways to go -- the online retailing behemoth has taken a slow, yet calculated approach to attacking the grocery store. After years of testing the AmazonFresh program in its Seattle hometown, it began expanding the grocery delivery service to other cities in 2013. Today, it delivers fresh fruit and meat in parts of New York, New Jersey, Pennsylvania, Connecticut, California, Washington and Maryland. It also delivers food through its Amazon.com website and its Prime Now program.

 

And even though research from Cowen & Co. pegs Amazon's market share of food and beverages sold online in 2015 at about 22 percent, that overall online grocery market in the U.S. is pretty small. Out of the $795 billion Cowen expects Americans to spend on food and drinks this year, it estimates only about $33 billion of it will be spent online.

 

That's because it has taken shoppers a long time to grow comfortable with buying their apples, chicken breasts and granola online when they can stop by a physical store on the way home from work and actually touch and smell the food they're buying. Companies struggle to profit from the very expensive business of picking, packing and transporting fresh food to their customers. It's much easier to mail a video game or book, which doesn't have to be kept cold or free of bruises.

 

But for Amazon, the grocery business not only brings more sales, it could also make its business more profitable. People tend to buy groceries weekly or daily, so getting them hooked on delivery justifies sending trucks out more frequently. Then any general merchandise, like a book or toy, that Amazon sells along with the food adds to profits. And since Amazon will need more trucks for grocery delivery, it could reduce its reliance on shipping companies, which have contributed to soaring costs. For now, Amazon is likely to take added grocery costs on the chin, in hopes it will pay off down the line.

 

Growing its AmazonFresh and Prime Now offerings suggests Amazon is gearing up for the long haul in grocery. Though traditional grocers are not likely to see sales migrate to Amazon right away, that luxury won't last. And just like bookstores, your local grocer could be toast.

Thank you Feds...

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Quivering Lip's picture

They should probably buy Tesla too. That way you can jump in your self-driving car while surfing the web buying shit from Amazon on your way to pick up over priced food from Whole Paycheck.

Or you can just order everything online and wait for a drone to deliver your $3 organic apple and your $4 organic red pepper.

shovelhead's picture

"SIRI ...Go get me toilet paper! Hurry!"

Squid Viscous's picture

Siri: "Did you eat at Shitpotle last night again?"

NDXTrader's picture

News, food, everything else. Time for Trump to tell the DOJ to bust up this monopoly

Oh regional Indian's picture

Ain't gonna happen bro, it is a Joo-oply after all, being bought by joobux....

shovelhead's picture

Lol.

This makes perfect sense. They're closing the Whole Foods down the street from my daughters house. She's elated. A real supermarket with real prices is moving in. Apparently the 'organic wages' are not matching the 'organic marketing' prices in hipsterville.

ParaZite's picture

Well, Prime Pantry should get a little more interesting. 

 

Stanley Lord's picture

Crap, now I have to stay out of Whole Foods and the supermarkets in NYC suck.

Anybody that buys anything from Bezoworld is a fool.

 

 

Hyjinx's picture

Fairway is the only supermarket in NYC worth a damn.  I constantly laugh at the Whole Foods crowd, just getting totally raked.

ludwigvmises's picture

Stick the fork in all other grocery stores! Amazon will destroy them.

Peterman333's picture

Now that they've got a brick and mortar presence, yes they won't make it easy on any competitor.

Amz realized they couldn't compete in the grocery sector without a brick and mortar presence. I don't care how fast same day shipping is, drones, etc, for grocery they needed a brick and mortar presence and now they've got it.

Stormtrooper's picture

Yes, true.  All other grocery stores have to make a profit to stay in business.  As long as speculators keep Amazon alive, they can continue to operate at a loss.  Until they can't.

Déjà view's picture

This is why Bezos named it AMAZON...

Amazon river and all its tributaries, covers parts of eight South American countries – Brazil, Bolivia, Peru, Ecuador, Colombia, Venezuela, Guyana and Suriname – as well as French Guiana.
But the "true" source of this enormous river has baffled many explorers over the past centuries, and continues to cause arguments even today.

http://www.bbc.com/earth/story/20160516-why-it-is-hard-to-find-the-sourc...

"True" source of profits...or Piranha...

the6thBook's picture

Mmm, I hope this blows up in their face.  People shop at amazon, because its cheap.  People shop at WholeFoods, because it is expensive and they think they are getting better quality food(And because they think they are better than everyone else).

 

Peterman333's picture

WFM is crashing, customers exiting in droves due to high prices and competitors selling organics for far less., this is great for WFM, it helps them to survive.

Amz has to bring in low/competitive prices and that will jolt WFM back to life. 

Kroger has eaten their lunch with Organics.

ParaZite's picture

Well, that's great, if you have a Kroger's in your area. For those that don't, it's a non issue. 

Also, Whole Foods Market has a good rep, albeit a high priced name brand product. So, online, they can find their market, and get their price point, with Amazon's buying power able to lower the cost via the supply chain, and with Amazon Prime Pantry, opening up a new market to those without a Whole Foods or Kroger in their area. So, there's a lot of upside. 

The downside, is paying off their debt. 

Peterman333's picture

Most off America does, Kroger owns stores from west coast to east coast. They're only called Kroger in the Midwest down to Texas and over to Atlanta.

The only major markets they haven't entered (and now probably won't due to Amz) are Florida and NYC.

NotApplicable's picture

I'm wondering how much debt they had, and if they're having any issues coming up with the cash for payments?

Snot Boogie's picture

The two Whole Foods in my area usually seem to have about two or three other customers when I go there.  Even then, the people checking out carry what they buy in their arms, so it can't be that much money.  I'm wondering if WFM was doing pretty bad, and AMZN bought them to make things look good.  The central banks probably just about own AMZN, and WFM crashing would hurt the narrative.  

ParaZite's picture

On the other hand, people without a Whole Foods in their area, can now buy from Prime Pantry on Amazon, and have it delivered. So, not only do they get the "exclusivity" of the  physlcal store fronts, but they can monetize the name brand on Prime Pantry, for people who love whole foods, but don't have one in their area. 

SoCalBusted's picture

Seems like a BTFD moment to me in grocers and possibly peak hubris/jumping the shark for Bezos.  The brick and mortar retail world is hard (DCs don't count).  Opening up some BS boutique retail stores doesn't give you retail chops.  Sure, WF probably has the margins, but I don't think it scales well outside of select urban and upscale suburban areas.

rrrr's picture

There is no substitute for cash.

ParaZite's picture

I like gold, but you'd never believe the weird looks you get at the McDonalds drive through when you try to cash it in. :P

Spine of Ruprecht's picture

I like $100 bills, but you'd never believe the weird looks you get at the McDonalds......

 

'fixed it for ya......

 

rejected's picture

True Story:

Offered a 1oz American Eagle for a FRN $13 DVD Movie. Refused, Security was called, The guy owned gold himself and just laughed at the clerk. He offered to pay for the DVD if I gave him the Eagle but I declined :)   Paid in fiat for the Movie while he explained to her how she just lost FRN $1500. My wife said I was nuts....

Spine of Ruprecht's picture

Cash...... the paper some call "hard currency"?  The nickel made of copper?  The copper penny made of zinc?

 

It's like "love".  What the fuck is that?

Quivering Lip's picture

 

“Millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy,” said Jeff Bezos, Amazon founder and CEO.

I'm assuming this deal has been in the works for sometime and that's the statement they come up with.

 

cheech_wizard's picture

Especially when their 365 label organic foods are grown in China... (I assume Lex Luthor did at least some research)

Sorry Jeff, Whole Foods reputation is shot through and through. Now if you want to know why it will get worse under Amazon ownership, one only needs to look at how much the Washington Post has gone downhill under your ownership.

 

allamerican's picture

had the works t-day dinner 4 6, think one on 57th.  absuloote' slopp on a plate.

allamerican's picture

had the works t-day dinner 4 6, think one on 57th.  absuloote' slopp on a plate.

Mr.BlingBling's picture

(A disparaging comment about the quality of the six Thanksgiving Day meals he purchased from the Whole Foods at a particular location in NYC.)

Daveo18's picture

My heart bleeds for all those out there that got caught in the short trap..!

[it doesn't really]

HominyTwin's picture

Selling out of the money calls on AMZN. Still here. Still making money. Though I did get it handed to me during the "trump" trade, once.

headfake's picture

Resistance is futile ...eventually there can only be one

ParaZite's picture

There can be, only one!

https://www.youtube.com/watch?v=YFBGUGbYDWw

Freaking youtube killed the sound. 

T-NUTZ's picture

It's time for the DOJ to break up Amazon.

0valueleft's picture

I'll sell Bezos my garden for the discount price of 1 billion, I'll even throw in my dog, my kids, my wife and my soul. Hopefully then they'll let me sit in between Mark Cuban and Mr. Wonderful, only then will I have arrived. I'll be respected as smaat wid stawks and bizness stuff, and you peasants can wish you were me. You can find out what cologne I wear and buy it, what car I don't drive but own and make lease payments on the same model. I'll start an ETF (ISTY) I'm smarter than You. You will buy it cause you respect me and want to be me.

Drink me in serfs, pray to me, obey my words I'll be your new God and buy you with a Bitcoin!

Nah, I like my garden.

Kreditanstalt's picture

What's "Amazon"?  What's "Whole Foods"?

Never shopped at either in my life.  I'm just another peasant...

This won't fly.

headfake's picture

Roosevelt wouldnt have liked this move, he hated and therefore dismantled monopolies.

baldknobber's picture

I for one can't fucking wait until the fad term "organic" runs it's course. ALL FOOD IS ORGANIC. I much prefered New and Improved.  I actually saw some fruit juice the other day that said Gluten Free on the label, and people wonder why I drink

wide angle tree's picture

All debt transaction.

 

Amazon is a bloated pig.

PitBullsRule's picture

I quit going to Hole Foods when I noticed it was costing me about 3 times as much as Walmart.  I guess Amazon can subsidize the prices with stock sales.  I'm still gonna go to Walmart though, because I have to work for money.  If they ever make money free, then I'll go to Hole Foods.

BeepBeepRichie's picture

Dont do it man. Thats all gmo monsanto big agra at walmart. Youll get cancer

blueskyranch's picture

Most groceries are GMO everywhere. Didn't Hole Foods get a nasty slap last year for something like mis-lableing food?

If you want fresh and organic, put in a garden. Doesn't take that much space. Compost, mulch, etc. assure the food is wholesome. 

Want to get off flouride and chlorinated water? A well takes care of that. RO the well water for drinking. 

Raise range chickens, goats, cattle etc to take to market.

I realize this is not feasable for city folks who work slave jobs but start planning now.

IronForge's picture

Voice to text.  Measles/Bezos-funnyvoiceread may be on to something here. Whole Foods usually has higher?margin items he could easily supplement to his distribution Channel add on as an incentive to his prime customers for instance.

 

BTW, I've heard reports that non organic food items are either GMO or have been finalized by glyco phosphate during their harvest therefore certified organic or natural may be the only way to get some decent Food Supplies

Snot Boogie's picture

Roundup may or may not be a danger to your health, but weeds are becoming resistant to it, so don't worry!

GeezerGeek's picture

As long as my weed is resistant to Roundup, I'm good. But has anyone done a study on what chemical compounds are created when a Roundup-laced plant is burned?