At the time of this writing, Whole Foods (NASDAQ:WFM) closed at $42.68 on a takeover deal from Amazon (NASDAQ:AMZN) worth $42 per share. Typically, an all-cash transaction with a 100% certainty would trade at a discount to the offer price simply based on time value of money, and as we know in life, there is never a 100% certainty when it comes to acquisition offers. So, the question is why is Whole Foods trading above the offer months out from a potential closing?
One theory would be the shorts simply decided to cover. Their short thesis is now broken, and there is no upside for them to hold this position. If a bidding war starts, they simply lose more, and the odds of the deal completely falling apart are rather slim. For new buyers, why would they be buying above the offering price? There is only one answer for that – they think it’s going higher.
The media has already lauded their praises on Amazon’s bold move. Indeed, it is. But it might be too bold for other competitors to allow to go uncontested. The largest grocery seller in the USA with 25% of the market is Wal-Mart (NYSE:WMT). In 2002, it had 7% of the market. Grocery is a key growth driver for the company. Wal-Mart has struggled a bit with some flops at high-end grocery forays in the past. Buying Whole Foods and optimizing it is more towards its core competency than trying to develop its own, high-end organic brand.
Companies of the scale and footprint of Whole Foods do not come onto the market often. Amazon’s purchase is an opening salvo right into Wal-Mart’s core growth engine. I don’t think Wal-Mart can ignore this and not bid. The market is clearly seeming to agree with a price above of the offer.
In addition to Wal-Mart, there may very well be other potential suitors. I would not rule out Target (NYSE:TGT). A higher-end brand fits Target well with its differentiation from Wal-Mart. Target does have long-term debt of over $11 billion, so it would have to overcome that small hurdle to make a bid. Target did purchase $3.5 billion of its own stock last year, and one must wonder if that is really the best use of its cash flow? This deal would immediately raise its revenue a very needle-moving 20%.
Costco (NASDAQ:COST) is probably not interested. It has a very specific model that is more Internet sales independent than other retailers.
How about Aldi? Probably not. It certainly has the capacity with over 8,000 stores throughout the world, but it already has Trader Joe’s and has its own expansion plans for the US market well planned.
1,144 store Publix (OTC:PUSH)? As a private/employee owned company, would rule it out. It tends to favor small store purchases in key markets it chooses to expand. Too big a pill to swallow.
Kroger (NYSE:KR) making a bid makes a lot of sense. Kroger is the largest pure supermarket chain by revenue at $115 billion. It’s the second largest general retailer (behind Wal-Mart) and the 23rd largest company in the United States. Whole Foods would be a nice gem to add to its portfolio and, like Wal-Mart, it has a scale advantage to optimize the operations of Whole Foods. Whole Foods is a business that it obviously understands well and would not be a stretch for it.
Obviously, investments carry risk. By buying Whole Foods here at $42.68, the downside would be limited to $.68, plus of course the time value of your money. Unless the deal completely falls apart, which is highly unlikely, your downside is capped. The potential for other bidders to enter is strong. My guess is 90% chance the bid goes higher one way or another. With $.68 per share downside, I will be entering a position during the week in WFM. The best scenario is a three-way bidding war of Wal-Mart, Kroger, and Amazon. Bezos At the Gate. If only two suitors, a final bid of $46-48 seems reasonable. With three, well, who knows what happens when egos are in play. I feel safe buying WFM here.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WFM over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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