It has been nearly three months since I wondered in writing whether anybody would step up and buy Whole Foods Market and a lot has happened since then. By now most people know that Amazon is in the driver’s seat with their $42 per share all-cash offer having been accepted by the WFM board of directors last month.
My assessment of the situation back in April was hit and miss. My estimate of fair value for the stock proved to be spot-on (“low 40’s”) but I dramatically underestimated Amazon’s interest in making a large acquisition. I pegged the odds of a deal at 40%, with the most likely buyers being a private equity firm or another grocery chain. Amazon must really like the idea of a Whole Foods combination, given that I do not believe it has ever offered $1 billion for another company, let alone the $13 billion Whole Foods will cost.
Today Whole Foods released its merger documents in preparation for the shareholder vote and the tidbits we learned were quite interesting. Specifically, four private equity firms and two grocery competitors reached out to the company, in addition to Amazon’s interest. Perhaps not surprisingly, Whole Foods focused on a deal with Amazon and never actually opened up the bidding to other interested parties. I suspect this is mainly because the company’s founder and CEO wants to keep his job and Jeff Bezos will let him.
In terms of where this deal heads from here, it was also noteworthy that Amazon’s initial offer was $41 per share and when Whole Foods countered at $45 Bezos and Co. made a best and final offer of $42. This is interesting because not only were they not really interested in increasing their bid, they also insisted that WFM keep quiet about the negotiations. Amazon even insisted on multiple occasions that they would walk away immediately if the deal was leaked or if other buyers were allowed to join the bidding.
Such a negotiating strategy clearly worked, but it does open up the possibility that a last minute competing bid could emerge. Imagine you are at a private equity firm, or another grocery chain who would be interested in partnering with PE to help fund a bid. Assuming you liked the idea of grabbing Whole Foods, the main reason not to would be the fact that Amazon has deep pockets and would likely be able to prevail most easily in a bidding war. But after reading the details of how this deal came about, it appears that Amazon might not be willing to raise their bid above $42 per share. In that case, as little as $43 or $44 might steal WFM away. You can bet that Jana Partners, the hedge fund whose 8% stake fueled the most recent takeover talk in the first place, would support taking the best offer possible.
Whole Foods stock closed today right at $42.00 per share, so there does not appear to be a high degree of confidence that another bid is coming. That may be true, but all it takes is one interested party who decided to take a shot at it. It could be a very quick turn of events (and relatively easy) if a single bid over $42 prompted Amazon to walk. I won’t bother placing odds on this happening given that I didn’t think Amazon would bid in the first place, but I don’t think it is a stretch to say that the details we learned today could sway another party who has been pondering making a higher offer. After all, they were never really allowed to bid in the first place.
Full Disclosure: Long shares of Amazon and Whole Foods Market at the time of writing, but positions may change at any time.