These Are The 7 Companies Amazon May Purchase Next

Tyler Durden's picture

On Monday, a Morgan Stanley report that Amazon was contemplating "disrupting" the Healthcare Distribution sector slammed stocks in the industry, sending the sector sharply lower. Fast forward two days, when Amazon's disruption appears to have started earlier than even MS anticipated, after a CNBC report that AWS CEO Andy Jassy is planning to announce that Amazon is teaming up with Cerner, one of the world's largest health technology companies, to help health-care providers better use their data to make health predictions about patient populations.

Yet while Amazon is pursuing aggressive market share theft in the healthcare sector, in retail it is expected to have a more amicable approach, and according to a note by Citi, shortly after its acquisition of upscale grocery chain Whole Foods, the next corporate move by the world's richest man will be to buy a prominent retailer. The question is which.

As Citi's Paul Lejuez explains, when AMZN bought WFM in June 2017, it led many to believe that AMZN might have aspirations to establish more of a bricks and mortar presence in the US. Citi also argues that while "grocery is different" (and AMZN may just stop there), Amazon may next target a retailer. It also make the following explicit caveat:

To be very clear, we are not asserting that AMZN will buy any of the names we suggest in the foreseeable future. We have no insight into any AMZN M&A activity or deal flow. We are simply performing an exercise where we consider the question “If AMZN were to buy something in our universe, who could make sense?”

Below, we show who Citi believes may be the best candidates for acquisition by Amazon, and summarize some key components of each of the companies that Citi suggests AMZN may eventually buy.

Why ANF?: (1) EV of only $620MM for 2 brands (A&F/Hollister); combined sales of $3.4BN, (2) own college like campus in Columbus, OH, (3) instant infrastructure to design, source and merchandise apparel on a global basis, (4) young customer base, (5) can use flagships (in amazing locations) to sell proprietary AMZN product.

With ANF, AMZN would acquire a very impressive headquarters in Columbus, OH, which is similar to a college campus. It has a strong culture and has a young workforce that could be leveraged across the AMZN organization.

 

As far as AMZN’s apparel aspirations, ANF offers an instant infrastructure to design, source and merchandise apparel on a global basis. ANF is vertical, so the brands would become AMZN’s proprietary brands to sell on its own website. And don’t forget they not only have a teen and young adult customer, they also have the A&F kids brand (abercrombie), which could have appeal to the mom shopping for kids clothes on Amazon’s website.

 

For less than $1BN, AMZN gets three apparel brands they would own (A&F, Hollister, abercrombie  kids), a seasoned design/sourcing organization, ~850 stores (including instant access to some of the most desirable locations in the world), and a campus like headquarters they can use (with space to build on further). Oh, and we estimate ANF generates in the range of  $50-100M of FCF annually (and imagine how much more productive/profitable those flagship stores could be if they were selling AMZN product). At that small price tag, there wouldn’t be much to lose.

 

if you’re AMZN, might it be more of an asset to suddenly have control over these flagship stores that are in some amazing locations. Just look at this list:

  • NYC (34,000 sq ft on 5th Ave and 56th St)
  • London (24,000 sq ft on Savile Row)
  • Tokyo (30,000 sq ft on 11 floors in the Ginza shopping district)
  • Paris (28,000 sq ft on the Champs-Elysees)
  • Milan (20,000 sq ft) – Corso Matteotti
  • Shanghai (25,000 sq ft) – Nanjing West Road
  • Singapore (20,000 sq ft) – Orchard Road

* * *

Why SFM?: (1) They’re already partners, (2) potential synergies with AMZN grocery delivery business, (3) compliments the WFM platform with a high/low price approach.

We outline 3 possible methods of obtaining a takeout value per share for SFM using the recent Whole Foods transaction as a guide (which may be more relevant in this case than looking at historical precedent transactions). The more likely of the scenarios is a $27-$33 takeout price, representing a 30-62% premium to the current price of $20.37 (11/16/17). Stock Price Premium Using Whole Foods As a Guide: Whole Foods was taken out at a nearly ~30% premium. This would imply a takeout price of ~$27/ share for SFM (using it current stock price of $20.37), at a ~13x TTM EV/EBITDA. Note that this would be significantly higher than the historical average of precedent transactions in supermarkets of 7.4x TTM EBITDA and Whole Foods  at 10.3x TTM EBITDA.

* * *

Why BBBY?: (1) Store space already dedicated to online pick-up, (2) access to growing furniture space, (3) logistical/fulfillment know-how for large items, (4) overlap of merchandise assortments, (5) 1,100 off-mall stores across N America.

AMZN could acquire BBBY for a similar figure as RH - about $4.4B assuming the same 20% stock price premium – and would achieve still gain a physical F&HF presence and large-items fulfillment know-how while avoiding the drawbacks associated with a potential purchase of RH.... We do not think an AMZN purchase of BBBY is imminent. Only about 8% of BBBY’s sales come from furniture, while the majority of the remaining sales are items that consumers are increasingly-willing to buy online. BBBY looks significantly over-stored, even excluding non- BB&B brands. And BBBY’s product assortment is narrow compared to a retailer like KSS. Finally, from a financial standpoint, BBBY looks to be in structural decline and while we believe AMZN could certainly turn BBBY around, it’s unclear to us whether they would have interest in investing the capital and resources necessary to do so.

* * *

Why RH?: (1) Access to growing furniture space, (2) logistical/fulfillment know-how for large items, (3) overlap of high-income consumers, (4) both run a membership model, (5) equity/recognition of RH brand.

Within our furniture and home furnishings (F&HF) coverage, RH comes up most frequently in conversations as a potential AMZN target. The F&HF market is an attractive one given it is highly-fragmented, is growing at a MSD rate overall and is seeing sales rapidly shift online. Over the last five years, ecommerce F&HF sales have grown at a 15.9% CAGR and are projected to reach 17% of the domestic industry total by the end of 2017, up from 10% in 2012. 

 

We think a F&HF acquisition makes sense for AMZN for two main reasons. First, an acquisition would aid AMZN’s build-out of large-package fulfillment, which – like grocery – is fraught with complexity. And second, an acquisition could provide AMZN with an immediate physical F&HF presence, a factor that remains important to consumers purchasing furniture and home furnishings product (again, similar to groceries).

 

RH’s valuation isn’t particularly compelling as the stock is trading at 25x FY2 P/E and 15x EV/EBITDA. Assuming a 20% stock price premium, an acquisition of RH would cost $4.7B which is far from prohibitively expensive for the online giant, but likely does not represent the best use of capital given the factors noted above.

* * *

Why AAP?: (1) AMZN’s growing interest in the automotive space, (2) price is important for the DIY customer, but convenience and immediacy is more important, which highlights the need for stores, (3) highly specialized inventory build out will take time; AAP provides inventory breadth and depth, (4) specialized supply chain, (5) even at a 20% premium, AAP is less than half the value of ORLY and AZO.

We think we can make the argument that Amazon could buy one of the auto part retailers. When considering the needs of the DIY customer, we argue that most DIY’ers aren’t going to drive to a store, ask a store associate a bunch of technical questions on what they need to buy and do and then purchase the parts on AMZN and make the repair themselves. Most DIY’ers likely don’t make the same repair more than once so they always need guidance. Therefore, Amazon owning an auto part retailer with brick and mortar presence would achieve the ability  to cater to consumers looking for the convenience and immediacy needed.

 

However, we think a buyout of AAP is likely a long shot due primarily to 1) AMZN could likely finance the deal but it’s fairly soon to do an acquisition of this size, especially with the upcoming WFM integration and 2) AAP has experienced challenging demand trends (similar to WFM) but lacks large synergistic characteristics that would make AMZN uniquely capable in improving productivity. In the end, if the argument for AMZN’s acquisition of AAP is to gain market share through buying a major player in that sub-industry of retailing, the list of targets could get fairly long.

* * *

Why KSS?: (1) 1,100 off-mall stores to sell AMZN top-sellers, use for pickup/returns, (2) would own KSS proprietary and exclusive brands, (3) middle America customer, (4) $1BN+ annual FCF, (5) already an AMZN/KSS partnership.

After AMZN bought Whole Foods, if we had to come up with a list of ten companies AMZN could target next, KSS would have been on that list. After seeing the partnership between the two companies with KSS accepting AMZN product returns in 82 of its 1,100+ stores (with 10 of the stores home to a 1K sq ft AMZN shop in shop), we would argue KSS moved higher up that list. One of the reasons we believe AMZN might have chosen KSS as a partner to test its product returns to stores is that they have off-mall locations, which offer an easyin, easy-out shopping experience. Their store base is also relatively young, as 30% of their stores have been opened over the past 10 years (vs ~10% at JCP and ~7% at M – and M and JCP are largely mall-based).

 

The 1,100 KSS stores would offer AMZN many points of distribution that could help them in several ways. And let’s keep in mind, if AMZN bought KSS, we shouldn’t necessarily think of them as simply running the KSS chain. These stores could be rebranded as Amazon stores or “Amazon Kohl’s”.

 

At a $12BN acquisition price (assuming a 20% stock premium), a KSS deal would be about 10% less than what Whole Foods cost ($13.7BN). It would cost AMZN $9BN plus the assumption of $3BN in net debt. And let’s be honest, department stores are in a tough spot in the current retail environment, which might make KSS a more willing seller. Since department stores are facing serious challenges, we believe if there is one that can link up with AMZN, the others will be in that much more difficult of a spot. And let’s not forget, over the past 4 years KSS has generated an average of $1.2BN in FCF, including $1.4BN last year. We estimate they will generate around $1BN this year and for the next several years.

* * *

Why KR?: (1) Sizeable grocery presence with assets that may be of interest, (2) provides another point of attack against WMT, (3) obtain valuable consumer data via KR 84.51 division, (4) significant click and collect presence to help with last mile grocery challenges.

KR is the 2nd largest grocery store in the U.S. and would allow AMZN a way to take a sizeable 14% share of the US grocery market (vs. the paltry 2% share they attained through WFM). KR has 2,796 store locations- of which 1,445 fuel centers and 2, 255 pharmacies reside (pharmacy and fuel centers could be additional segments of long-term interest to AMZN). KR is also one of the best run grocery chains, in our opinion, which has led to continual market share gains. Competitive advantages for KR include: real estate locations, data analytics, purchasing power, vertical integration (they own several processing/production facilities, have self-distribution capabilities which can be enhanced by AMZN, and also have a large private label sales  mix which may be of interest to AMZN), and a large loyal customer base.

 

KR has a treasure trove of data that could be useful to AMZN to better personalize promotions and improve space optimization (could improve both AMZN and KR grocery operations). Their 84.51 data analytics division tracks 2,700 consumer attributes to determine geo density from a competitive perspective (including restaurants), hobbies (spend index across entertainment, travel), and social connectedness data, which are used to create a rich picture of their customers. This data allows them to more truly personalize their offerings and the  shopping experience.

 

We outline 3 possible methods of obtaining a takeout value per share for KR using the recent Whole Foods transaction and past supermarket transactions as guides. The scenarios indicate a $29-$34 takeout price, representing a 30-53% premium to the current price of $22.28.  Stock Price Premium Using Whole Foods As a Guide: Whole Foods was taken out at a nearly ~30% premium. This would imply a takeout price of ~$29/ share for KR (using it current stock price of $22.28), at a ~6.8x TTM EV/EBITDA. Relative P/E Multiple Turns Using Whole Foods As a Guide: Whole Foods was taken out at nearly 30x ’18 P/E at the time of announcement which was ~6x turns higher than its ~24x ’18 P/E before the announcement. Adding 6x turns to KR’s current ’18 P/E of 11.3x results in a 17.3x P/E multiple. Applying a 17.3x multiple to KR 2018 EPS estimate of $1.98 results in a ~$34 / share takeout price.  EV/EBITDA Multiple Using Precedent Supermarket Transactions As a Guide: Using the supermarket precedent transaction (see Figure 3 below) average EV/EBITDA takeout multiple of 7.4x TTM EBITDA derives a $33 takeout value.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Clock Crasher's picture

I don't give a shit.  Just keep off setting inflation and shipping for me.  

What I can't get locally I get from Amazon if nots cheaper on Ebay or direct from the vendor online. 

AMZN going to 2,000 right next to PCLN

 

tmosley's picture

"Corporate bankruptcy law firm" sounds like a good choice.

Interpret such a purchase any way you like.

Handful of Dust's picture

Merry Christmas!

BTW, your fired!

J.Crew to Close 50 Stores As Sales Plunge Again

There is apparently no end in sight to the deterioration of the J.Crew brand.

https://www.msn.com/en-us/money/companies/jcrew-to-close-50-stores-as-sales-plunge-again/ar-BBFsFTO?li=BBnb7Kz

 

“I fundamentally changed America!”

 

~ Soweeto bin Bama

YUNOSELL's picture

What, no photo of Bezos with his manaical laughing this time?   I AM DISAPPOINT

Stuck on Zero's picture

I think they'll buy a law firm. They'll be able to deliver an attorney to your house or business or accident in minutes. Attorneys can moonlight as Amazon drivers.

Endgame Napoleon's picture

Since they are partnering to provide healthcare predictions on groups, perhaps, Bezos will get into the insurance industry, helping the actuaries and underwriters to make better predictions about who will get sick so that affordable catastrophic policies are more feasible.

Furniture is WAY more interesting.

How about saving Restoration Hardware, or better yet, save any of the few furniture makers that still [fight the good fight], manufacturing fine furniture in the USA. An Italian family already saved Henkel Harris, a company that creates museum-grade reproductions of some period styles. Stickley has managed to thrive with 100% [Made in the USA] production. You can literally stand in the drawers of their dressers; floating construction works. It helps that they have a name in art history.

Oh wait.....Bezos is all about profit. Well, he did buy the WaPo so maybe not.

shitshitshit's picture

Someone explains me how on earth can a company that loses money on more or less every single product invest so much money, jeopardize established monopolies and cartels, and get away with their dumping and other straightforward reckless behavior?

Looks like the finances of Amazon and Google share some common ground. 

 

 

Squid Viscous's picture

they hired that reptile kike Mickey Drexler, retailing guru LOL

now taking a dirt nap.

cue the worlds smallest violin

algol_dog's picture

Yes, 7 buyout possibilities that will make them no money and most probably lose them money, yet their shares will be bid up regardless. I ask, how does this make Bezos a brilliant CEO when he has carte blanche to do anything he wants, with no accountability, or responsibility to manage money?

A monkey could do the same.

waspwench's picture

Bezos doesn't have to be brilliant.

Amazon is an arm of the government and is underwritten by the govenment. Amazon is a huge surveillance and information gathering organization. Bezos is just the front man.

ThanksChump's picture

Evidence (that isn't half baked stoner-technophobe bs)?

Amazon partners with government agencies, just like every large business does. Just like I and many thousands of other small/large businesses do. So what?

Oh yeah, they're good at it. You think that money should be yours. Fucking communists. Sheesh.

claytonmoore50's picture

What a crock!

I don't see AMZN execs being foolish enough to buy any company that depends on malls for their retail business model.

Malls are dying...RIP

NoWayJose's picture

What Bezo the Clown has done is set up a distribution and delivery system that outperforms everyone else. He can use that to 'sell' any product he wants - and crush competition.

Endgame Napoleon's picture

Supposedly, he makes people work hard. If the others want to compete, hire people who are not on a babyvacations every five minutes.

Wrenching Away's picture

I have a lot of customers that work for Amazon corporate, and they all pretty much say its a meat grinder. People burn out after a few years there, or are simply chased out if they don't perform.

max2205's picture

all the dying stocks say we could get bought by amzn..... nice try

BrokeMiner's picture

Amazon should buy twitter. get rid of that dipshit cuck jack who couldnt run a lemonade stand

Iconoclast421's picture

If I had to guess one I would pick AAP.

Arnold's picture

I already buy most of my old stuff repair/replace online via E Bay or a specialty shop for the scooters.

I look at the mirror and I see the home mechanic dying.

Christ, they aren't even getting Driver's Licenses any more.

Endgame Napoleon's picture

I am rooting for the furniture, just because I like to look at furniture.

Although.....

People do use the retail space to see the product. Many then s*** the commission salespeople who are paid squat in most cases, going to a factory store to buy it in a state with no sales tax.

The good jobs that people could make a living at were the factory jobs.

And, of course, the office work goes to the absentee momma clique with unearned from spouses, exes or welfare and child tax credits.

Fun business, though.

bottom_line's picture

He wanted to buy the USPS but they couldn't find anyone in the accounting department.

CrazyCanadian's picture

None of the above seem like a good choice.  Must be a slow news day.

Endgame Napoleon's picture

Why not health insurance? He could disrupt there, creating a different kind of efficient, vehicle-independent delivery system. He could make a much better website than the Obamacare programmers.

No one wants it, yet the profit potential is Yuge.

No absenteeism gangs will be tolerated for the back-office jobs and the unlicensed salespeople who end up selling half of the policies, albeit without meeting their quotas in many cases.

Bezos will clean that bad boy up.

[Insert the Tylers’ Photoshopped Bezos portrait]

loveyajimbo's picture

Rite Aid (RAD) is a steal at these prices.

Bigly's picture

I love Rite Aid and am pissed every time I see more people in the parking lot of the dingy CVS across the street.  

Rite Aid has clean stores, decent inventory and fair prices. I am not sure why they are not kicking CVS in the ass....size? They need more stores.

Yes We Can. But Lets Not.'s picture

FWIW, concerning brick&mortar retail.

I recently bought a chain for my Stihl chainsaw on eBay from Chinese merchant.  $4.63 (that is not a typo) all-in delivered to my door here in USA all the way from friggin China!  Exactly how that works for the seller, I'm not sure.  Took 6 weeks to arrive!  Works great, like a knife through warm butter!

Cost at my local Ace Hardware is around $30 incl. taxes.

No more paying Ace to sharpen my old chains.  From now on, I chuck the old chains, and buy 5 at a time from China.

adr's picture

Why are you listing companies by stock ticker instead of their actual names?

OH, BECAUSE THE PRODUCTS PEOPLE AND ACTUAL BUSINESS DO NOT MATTER. ONLY THE FUCKING SYMBOL TRADED ON A FUCKING SCREEN THAT CAN BE MANIPULATED TO A PRICE TO MAKE FAKE MONEY!!!!

What would happen to the ticker ANF if all of a sudden an Amazon buyout was posted? The algos would send it up 25-30% in milliseconds. Would that have any material effect on the actual underlying business? Not a chance, but it would make a few primary shareholders a lot of instant cash.This garbage article is about upping share prices, not creating any real improvement in underlying business.

Abercrombie is dead, the clothes aren't popular and massively overpriced. Hollister is OK but really geared for tweens to show off too much ass for perverts like Al Franken. A 12 year old could buy panties at Victoria's Secret that would cover more skin than Hollister shorts.

Bed Bath and Beyond exists off 20% off coupons and the will of Wall Street to reward failure with increased market cap. The stores look like shit and have a skeleton crew to run them. If you get the feeling of bankrupt Brookstone when you walk through the door, you aren't wrong.

Fuck Restoration Hardware. I've never seen a more worthless store. Absolute garbage product selling for astronomical prices because rich people are stupid. Probably a good buy for Amazon though since Bezos wrote the book on the stupid customer base.

 

Endgame Napoleon's picture

The retail space occupied by Restoration Hardware has to be a [massive] overhead drain. The product selection is, unfortunately, mostly Made in China, BUT the design is better than most. That is why I say, if you cannot save the finest American craftsmen, save the designers.

StreetObserver's picture

AssWhole Foods moral is already collapsing. I made sure to announce to all the cashiers this morning, after I used their bathroom and didn't buy anything,

"Amazon has contracted to build 400 Amazon Go stores across the country. No more cashiers' jobs needed, just a smart phone...you guys should start looking for new jobs."

Like starbucks, another corporate owned enemy run by Mattoids, I recharge my power tools on their outlets, eat my real organic food I buy elsewhere at their tables, making phone calls and then use their bathroom, but never spend one dime there. 

freedom1798's picture

How about listing the actual names of the companies, dipshit?  I guess your company is ASS.

chippers's picture

Please let them bail me out of M

chippers's picture

Please let them bail me out of M

Consuelo's picture

 

 

Amazon grows in direct proportion to an individual's choice to use/purchase from them.   It is that simple.

 

I know, because I do it all the time.   Not that I necessarily want to either, but the lure of convenience is a supremely hard habit to break.

 

 

Endgame Napoleon's picture

Amazon grows in proportion with the hideous, slithering snake of traffic that goes on for miles and miles, threatening to engulf all of the after-work hours of hardworking employees and the babyvacationing time of the frequently absentee employees into its reptilian jowls.

Anteater's picture

Here's your pic of you thinking about what he'll buy next:

http://tinyurl.com/y9bm6yvn

He's already telegraphed what he's going to do, that's to

add med/rec/pharm dispensaries to Whole Food stores,

then launch PrimeCoin, where you can invest your future

purchase money for credits that grow in value, because

PrimeCoin will avoid SALT sales taxes, and you can trade

them online with other buyers for cash or commodities,

so will become the massive legal money-laundering CC.

 

PrimeCoin! Buy $1000 right now, and get a diesel blunt!!


The moment he announces this, AMZN will double in

value, and he will become the world's richest person.

And you'll be holding a worthless BTC chain-wallet. : \

FredFlintstone's picture

What an arse, writing an article and using the stock ticker and not including the company names.

JustPastPeacefield's picture

Yup, I mean, you want me to look up all of these tickers to read the article? I can guess a few, but have better things to do. 

FredFlintstone's picture

Why would they buy any of these companies? Makes no sense. Its like Henry Ford buying a buggy whip manufacturer. They just need to go to the source of the products. Restoration Hardware does not make shit. They have other companies create stuff, which they market.

captain whitewater's picture

I never shop Amazon for anything. I am a power seller with 5000 sales in 19 years on ebay. Surprisingly, when I do buy mailing supplies, clamshell plastic display holders and some shipping tape I see Amazon.com on the box when it arrives.  That means that ebay is where many Amazon sellers dump their products for sale. Talk about stupid business strategies!!

Why not just list it on ebay and sell it for less commision to the Bezos a-hole?

The lesson here is:

Nothing on Amazon I need is cheaper than I can find it for on ebay.

NOTHING!

ds's picture

Below the radar is their stealth acquisition of big data start-ups. They are behind Google and catching up. Growing the talents from within is too expensive. Many start ups are by wannabees, full of smoke and mirror. AMZN has been smart recently to dreg through the dirts and find the unpolished gems. 

wide angle tree's picture

Amazon is no longer disruptive. Totally not impressed by the website or the customer service any more. Online retail has zero barriers to entry. If Walmart decided to lose money on every sale it would crush Amazon.