Is The CVS Health/Aetna Proposal Really Just About Amazon?

Financial journalists seem to have a pretty simple playbook these days. Most any retail-related corporate development is a direct result of Amazon (AMZN). Plain and simple. No questions asked.

Last night it was reported that CVS Health (CVS) has made a bid for health insurer Aetna (AET). Immediately the media closed the book on the strategic rationale for the deal; Amazon might soon start offering mail-order prescriptions and CVS needed to make a bold move to counter that attack.

If CVS is really most worried about Amazon stealing away its pharmacy customers, would the best counterattack to be buy the country’s third largest health insurance company? Does that make sense?

It seems to me that the best competitive move to help insulate you from losing prescription share to Amazon would be to buy a last mile delivery company and use it to offer same-day or next-day prescription delivery to the home. After all, it is not like Amazon has any scale in the drug wholesale business, considering that they have yet to even enter the business to start with! And even if they do get into the business, are they really going to be able to get better pricing for drugs than CVS can, with its existing network of 10,000 retail pharmacies?

I would suggest that the CVS bid for Aetna is more about extending their corporate strategy of becoming a vertically integrated healthcare services provider. You have to remember that CVS bought Caremark, a pharmacy benefits manager, or PBM, more than a decade ago. They started Minute Clinic, the largest retail walk-in clinic chain in 2000. They acquired Omnicare, a pharmacy specializing in nursing home services, in 2015. Becoming more than just a retail pharmacy chain has long been the entire idea behind the company. It also explains why reports say that CVS and Aetna have been talking for six months (this idea was not just thrown together quickly because Amazon is applying for pharmacy licenses).

Adding a health insurer to the mix was a logical extension of that. Competitor United Health took the opposite route, as an insurance company that added Optum Health, a PBM, later on. That strategy has been wonderfully successful and I suspect that CVS and United will dominate the integrated healthcare services business for years to come.

Of course, the narrative on Wall Street has nothing to do with any of this. CVS stock is getting crushed today and United Health is up three bucks. The one-year charts make it seem like these businesses have nothing to do with each other:

To me it is simply baffling that UNH trades for 21x 2017 earnings estimates and CVS commands just 12x. If CVS really does build out a UNH-like operation, with a small retail pharmacy division, I can’t fathom how that valuation gap won’t narrow over time. But the investor community right now just can’t get that bricks and mortar component (no matter how small it would be post-Aetna) out of their heads.

What is probably most interesting is that Amazon does not have a history of putting companies out of business when it enters new markets. Amazon started selling books online in 1994. It launched the Kindle e-reader in 2007. If any bricks and mortar retailer should have been gone by now, it would have to be Barnes and Noble. And yet they are still alive and kicking:

A lot of people thought that Best Buy was finished once Amazon started selling a huge selection of consumer electronics. After all, with thousands of reviews, great prices, and fast shipping, why bother going to a store to buy a TV or computer? And yet, here is a five-year chart of Best Buy stock:

All Best Buy had to do was offer price-matching and quick delivery to keep a lot of market share from people who like buying online. And then you will always have a subset of folks who like kicking the tires in-person and asking knowledgeable people questions about the products.

While Amazon’s reach and e-commerce infrastructure will seemingly allow it to always take a certain amount of market share, it does not typically spell death for competitors. This is especially true when Amazon can’t offer anything better than anyone else. Plenty of companies can offer good selection and good prices, and they are finally spending the money to handle the quick delivery too. And with physical stores, in some cases they even have a leg up on Amazon.

Jeff Bezos likes to say “your gross margin is our opportunity.” By that he just means that if you mark up your prices too much, for no good reason, Amazon will undercut you and take your market share. For that to work, margins have to be high in the first place. For books and consumer electronics, gross margins aren’t very high. For other areas like auto parts, where product markups are 100%, do-it-yourselfers will probably shift business away from bricks and mortar retailers and to Amazon for certain items.

In the case of pharmacies, we are not talking about huge markups, from which Amazon can really offer a significantly better deal. Sure drug prices are sky-high in many cases, but there are a lot of middlemen that split the profits. Manufacturers ship product to distributors, who stock the shelves at the pharmacies upon receiving orders, who resell to consumers. Amazon is starting from scratch and has none of those capabilities yet. If their plan is simply to buy drugs from wholesalers and ship them via Prime to their customers, there is not going to be a lot of margin to shave off in the process, nor will they be doing anything different than others.

That becomes even more true because they will not have scale at the outset to get better wholesale pricing from the suppliers. And if Amazon goes directly to the drug makers demands better prices, the drug companies will just say, “sorry, get your supply from the same places everybody else does.” They are not going to voluntarily give up margin when they don’t have to.

And then there is the whole issue of whether Amazon can partner up with the employers, PBMs, and insurers to get access to their customer bases. Is Wal-Mart or Target going to add Amazon to their preferred network for employer-sponsored prescriptions? If CVS buys Aetna, will they let Aetna members get their drugs through Amazon at the same prices they could through CVS retail or mail order? And what is stopping CVS from hiring drivers at $15 an hour to drive around their local neighborhood delivering prescriptions to people’s homes? Does Amazon really have any competitive advantages in this space, assuming they enter it in the future?

I guess they could buy Rite Aid and Express Scripts, to add pharmacies and a PBM, but even after they spend all that money and integrate those businesses, aren’t they just in the same boat as CVS and Walgreens? Sure they are players at that point, but how will they crush the competition?

This is why I am skeptical that Amazon will try to do everything, will succeed at everything, and will kill off legacy providers that have been doing this stuff for decades. When I see a powerhouse like CVS, which will only get stronger if it buys Aetna, trading at 12x earnings, with the rest of the market trading at 20x it just doesn’t make a whole lot of sense. As Warren Buffett would say, “in the short term the market is a voting machine, but in the long term it is a weighing machine.”

Full Disclosure: Long shares of Amazon and CVS Health at the time of writing, but positions may change at any time

 

 

 

Even After 30% Decline, Equifax Shares Not Cheap

It seems that data breaches are going to become the norm globally, if they have not already, so whenever a company is hit by hackers and the stock price declines as a result, I try to take a look and see if there are investment opportunities. The best example was Target several years ago, when hackers pierced the retailer’s in-store credit card scanners and stole customer payment data. While the media would have had you believe people were going to abandon the chain for life, after 6-12 months (and many more hacks of other companies), it was business as usual.

Equifax (EFX) might be a different animal given that they are in the business of collecting credit data, but most corporations do not seem to be much of a match for professional hackers. So while it is easy to argue that their security should have been stronger than Target’s, I am not so sure that a year from now Equifax’s business will be materially harmed. It is worth watching, however, since there are other data providers corporate clients can use.

What is interesting to me is that even after large drop (in recent weeks EFX shares have fallen from the low 140’s to today’s $103 level), the stock is not cheap. In fact, it appears it was quite overvalued leading up to the hack disclosure, making a 30% decline less enticing for value investors.

I went back and looked at Equifax’s historical valuations and found that the stock has ended the calendar year trading between 14x and 23x trailing free cash flow since 2010. I would say that 20x is a fair price for the company.  But pre-hack the shares had surged more than 20% year-to-date and fetched roughly 27x projected 2017 free cash flow. So at today’s prices they still are trading at the high end of recent historical trends at ~20x.

For investors who think this hack will come and go without permanently damaging the Equifax brand, the current price is a discount from recent levels but hardly a bargain. If you are like me and would want to see how financial results come in over the next 6-12 months (to see if customers are bailing), you would want a far better price if you were going to start building a long position now. And even when you felt comfortable with the long-term prospects of the business, the current price would hardly scream “buy” at you.

The stock seems to be acting well in recent days, which suggests many are taking the bullish view. While I don’t necessarily think that is the wrong move, recent history suggests the stock isn’t worth the $140+ it was trading at prior to the hack.

Full Disclosure: No position in EFX at the time of writing, but positions may change at any time

AutoZone’s Numbers Don’t Suggest Amazon Will Replace Them Or Their Competitors

After a huge rally over the past five years, shares of auto parts retailer AutoZone (AZO) have taken a beating in recent months as investors fret over Amazon’s ability to become a full service parts supplier.

What is interesting, however, is that auto parts industry observers are far less optimistic about Amazon’s desire and ability to break into a business that often requires super fast delivery (far less than even two hours) and a huge selection of SKUs. Simply put, auto body shops suddenly dumping their relationship with AutoZone seems unlikely. In that case, AZO’s share price slump from $800 to $500 lately is probably unjustified.

There is little doubt that non-time sensitive auto-related purchases have a place in the online world. If you want to stock up on car air fresheners or get a new license plate holder, Amazon is a good place to look. But for more specialized needs, where price is not always the most important factor (getting your car back as soon as possible is), the distribution networks powering the large national auto parts retailers should still provide certainty, comfort, and value.

To see exactly how much AutoZone’s business has been impacted by Amazon, I looked back over the last 15 years to see the trend for the company’s sales per retail square foot. After all, if auto part sales are moving online in a material way, the average AutoZone retail store should be seeing sales declines. This would show up in sales per square foot since a store’s size is constant even if more stores are built.

Here is a graph of AutoZone’s sales per square foot since 2003:

Can you see Amazon’s impact in that graphic? When did they really accelerate their auto parts selection? Does it look like they are having the same chilling effect on AutoZone’s business as they are on, say, JC Penney? I just don’t see it.

For those expecting the impending doom of auto parts retailers like AZO, I think their death may be greatly exaggerated in Wall Street circles lately. In fact, it is notable to point out that over the last five years (when e-commerce growth has really started to disrupt traditional retailers), AutoZone’s revenue has grown from $9 billion to $11 billion, leading to an increase in free cash flow from $27 to $34 per share.

Full Disclosure: Long shares of AZO and AMZN at the time of writing, but positions may change at any time

Gilead Sciences Take First Step Towards Higher Valuation Multiple

It has been a tough couple of years for shareholders of Gilead Sciences (GILD), the leader in treating HIV and Hepatitis C, or HCV. After shocking the biotechnology world by buying little known Pharmasset in 2011 for $11 billion, which gave them what would be become the leading HCV treatment, Gilead’s stock soared as Sovaldi (and later iterations of the drug) set a record for the best drug launch in the history of the industry.

However, as Gilead effectively cured thousands of patients in short order, it became clear that their HCV franchise would peak, and then slowly decline over time. As profits peaked and turned down, so did GILD shares, beginning in 2015:

What happened next was a classic Wall Street (read: short term focused) reaction. The stock went from darling to dud because Gilead had nothing in their drug pipeline that could offset the loss of HCV revenue after those initial patients were cured. At the beginning of 2017, GILD stock fetched $72, or just 6 times trailing 12-month free cash flow. A free cash flow multiple of 15-20 is pretty normal for the pharma and biotech space, so investors were essentially saying that GILD was going to see its profits decline more than 50% permanently.

I started buying the stock in late 2016 because the situation seemed very similar to instances when quality drug companies come to the end of the patent life for one of their best selling medicines. Knowing that generic versions are coming, investors drastically cut the earnings multiple they are willing to pay, in case new drugs never come to pass.

Of course, this ignores the fact that the vast majority of the time those same companies take actions to limit the profit decline and eventually grow again. In my October 2016 quarterly letter to clients I wrote the following:

“The negative case for Gilead ignores the fact that corporations are very much like living creatures; they do not exist in a vacuum but rather can pull other levers and take actions to offset negative events. For instance, what happens if Gilead discovers new medications for other diseases? What if they siphon profits from their HCV drugs to acquire other companies in order to diversify their product pipeline? What if they use profits to repurchase their own stock, making each remaining share more valuable? Better yet, what if they do all three?

For example, Pfizer’s cholesterol drug Lipitor had sales of $9.6 billion in 2011. In 2012 sales fell by 60% after the patent expired and generic versions hit the market. To reflect this known reality, Pfizer stock closed out 2011 trading for $21 per share, or roughly 9x annual earnings. By 2015, Lipitor sales had plunged by nearly 90% but Pfizer’s annual earnings had only fallen by 5% as other products filled the void. Pfizer stock ended 2015 trading at $32, or 14x annual earnings.”

Today we learned that Gilead has agreed to acquire Kite Pharma (KITE) for $12 billion in what will likely be just their first step in a process to build a formidable oncology franchise. I would expect more deals like this, perhaps 1 or 2 over the next 12-24 months, to further diversify the company away from HIV and HCV.

If the transition is successful, investors will likely reward Gilead with a more normal valuation. The stock is only rising by 1% today, but over time there is no reason the valuation gap (compared with peers) will not close more dramatically. It will be a long time before Gilead gets back to peak profitability (2015 produced $13 per share of free cash flow), if they ever do, but let’s assume they can earn $10 per share in five years (versus perhaps $8 this year). Assign a reasonable 15 multiple to those earnings and Gilead shares would double from their current price.

Full Disclosure: Long shares of Gilead at the time of writing, but positions may change at any time.

Is the Enthusiasm for Charter Communications Getting Overdone?

Shares of cable operator Charter Communications (CHTR) have been on a roll lately, rising more than 50% during the last 12 months. You would think after such a big run that the company must have had a dramatic change of fortune, but really it is just a traditional cable company offering customers bundles of services while consolidating smaller regional competitors.

The story might sound a lot like Comcast (CMCSA) because they are pretty much in the same business. Comcast owns NBC Universal, so they have a content wing as well, but the two companies are the nation’s leading cable businesses in the United States, with nearly half of all U.S. households (~50 million residential customers cumulatively).

Investors would therefore likely conclude that Charter and Comcast were being afforded similar public market valuations, but you would be wrong. After Charter’s magnificent rise from $250 to nearly $400 per share (during which time Comcast shares have risen a more modest 20%), the smaller player now trades at a huge premium.

As the chart below shows, Charter fetches a 35% premium on EBITDA and a 60% premium on free cash flow:

It appears that merger chatter involving Charter may be behind a large part of the stock market move lately. Verizon (VZ) and Sprint (S) are both rumored to be eyeing a deal that would morph them into more than a cell phone provider, and perhaps adding wireless to the cable / internet / landline phone bundle would bring down costs and prove synergistic.

What investors seem to be missing, however, is that there is nothing unique about Charter’s business. The company still gets 40% of its revenue from cable video services, which are declining due to cord-cutting. The only strong business segment is broadband, which accounts for about 35% of revenue, but there is a limit there too. Population growth has slowed dramatically in the U.S. and offsetting cable losses by raising prices on internet service will only work for so long.

Charter has been an amazing investment since emerging from bankruptcy in 2009, but the stock appears very expensive. As more and more consumers move to streaming services for video content and drop their landline phones, cable companies are going to feel the squeeze. Perhaps that helps explain why a cable/wireless tie-up might make sense in the long run, but at nearly 12x EBITDA, there is very little margin for error in Charter stock. In contrast, Comcast appears to be a relative bargain.

Full Disclosure: Long shares of Verizon and Sprint debt at the time of writing, but positions may change at any time

 

Restaurant Bubble? Shake Shack Has Two Locations at One Mall

Once seen as a very strong industry riding the secular trend of Americans moving away from cooking at home, the restaurant sector is starting to feel growing pains. With U.S. population growth slowing and immigration becoming more difficult, same-store traffic declines are backing restaurant companies into a corner. The choice is simple: continue to open new units faster than your customer base is growing spending on food, or admit to investors that the growth they have come to expect is over.

High-flying fast casual burger chain Shake Shack (SHAK) has made the decision that, despite dozens of burger places popping up everywhere across the country, the name of the game remains growth. In fact, despite having fewer than 85 locations in the U.S. as of June 30th, the company now has two units open at the bustling King of Prussia mall outside Philadelphia.

Some bulls on the company will likely reference the Starbucks phenomenon whereby that chain purposely opens locations near each other in order to reduce the size of waiting lines during busy peak times. But this is different. Shake Shack has told its investors that it sees room for 450 locations in the U.S. alone. If your ultimate goal is to build 9 locations in every state, it probably does not make a lot of sense to have two in the same mall.

The bigger point has large implications for the industry. As more and more big box anchor stores close their mall locations (Sears, JC Penney, Macy’s, etc), landlords are trying to fill the spaces fast. And with so many bricks and mortar retailers struggling to compete in the e-commerce world, restaurants are an easy way to fill space.

It should not be hard to see the problem with this plan in the long run. With minimal population growth and declining mall traffic, over time there will be less of a need for restaurants at these locations, not more. And yet the industry continues to grow seats far faster than consumer spending. We are seeing the result already; less traffic per location, and thus less revenue and falling profits.

Shake Shack might be able to get away with overbuilding for a while, mainly because the chain started in New York and is brand new to most consumers as they expand across the country. But five years from now we are likely to look back and see that it was silly to have two Shake Shacks at King of Prussia (assuming mall trends continue in a similar trajectory).

As a long-time investor in the restaurant space, the current landscape is challenging. On one hand, Wall Street is giving many companies (not Shake Shack) meager valuations due to falling customer traffic. On the other hand, if the industry continues to build new locations for the sake of growth (and not due to demand exceeding supply), it will make it hard for any chain to post impressive financial returns.

How should investors approach these dynamics? Well, it looks like the franchising route might be the best way to limit downside risk. While lower sales will impact royalty streams for the franchisor, fixed cost deleveraging will impact the bottom line far more severely, and that will sting the franchisee first and foremost.

Shake Shack management would argue otherwise. In fact, during their latest conference call they bragged about having a second unit at King of Prussia mall. Essentially, they argue that it was a wise move as long as they sell more burgers cumulatively with a second location. After all, if the demand is there, why not book the sales?

However, this assumes that the demand will be steady and/or rising over time. Once Shake Shack loses its “newness” and more competing chains invade their turf targeting the same customers, we could very well see demand for their burgers fall considerably. Enough that two locations make little sense.

Full Disclosure: No position in Shake Shack, but positions may change at any time

Dillards Short Squeeze Makes LBO Less Likely Near-Term

It has been a little more than two months since my multi-part series on retailers highlighted the low valuations and negative sentiment on various companies, including department store chain Dillards (DDS).

In recent weeks the stock has soared, in part due to speculation that a massive short squeeze could be imminent. It looks like we are seeing signs of one right now, as the stock has moved from $48 in May to nearly $77 today.

Not only has the recent move narrowed the gap between market prices and intrinsic value, but it also greatly reduces the odds of a management-led buyout in the near-term. When the stock was in the 40’s, a $60 or $65 bid could very well have gotten done. But at current prices, offering a premium would very likely make a transaction less attractive. As a result, I would not be surprised to see the share price retreat after the current spike in short covering comes to a close.

Full Disclosure: Long Dillards debt securities at the time of writing, but positions may change at any time

Amazon and Kenmore: A Mismatch Made in Desperation

For years I have wondered why Sears chose not to sell Craftsman tools on Amazon’s web site. It just seemed like an obvious move to monetize a brand name they owned, given that their own stores are slowly disappearing due to customer disinterest. Earlier this year Sears sold the brand to Stanley Black and Decker to raise much-needed capital, and I suspect it is only a matter of time before the new owner utilizes Amazon to boost market share for the reputable Craftsman brand.

Yesterday the financial markets reacted quite strongly to the news that Sears will now sell Kenmore products on Amazon (the company still owns the Kenmore and Diehard brand names). Sears and Amazon rallied, while shares of competitors like Home Depot, Lowe’s, and Whirlpool fell sharply.

Unlike the Craftsman brand, which I believe resonates with most every demographic, Kenmore seems like an odd fit for Amazon. Clearly, Sears is feeling the pressure to stabilize its business and the country’s largest e-commerce retailer would seem to be a logical place to turn.

The problem is that the Kenmore brand has a loyal customer base, but those people are largely older, whose families have shopped at Sears for appliances for multiple generations and have come to trust the brand. In other words, the only customers Sears has left that shop in their physical stores, and more importantly, the last people who are going to consider buying a washer and dryer on Amazon.

Wall Street’s knee-jerk reaction (granted, most likely from computers, not humans) was to flee from the big box appliance retailers. This appears overdone because appliances only represent a small proportion of revenue at those chains, and they should be more Amazon-proof than many other bricks and mortar companies. The odds of this news materially impacting a Best Buy, Home Depot, or Lowe’s is minuscule, in my view. And the idea that the Kenmore brand is going to be reborn merely due to it being more prominent on Amazon’s site is wishful thinking. As a result, yesterday’s stock moves are likely to be short-lived, and they have provided investors with an opportunity.

Full Disclosure: Long shares of Amazon, Lowe’s, as well as Sears’s corporate bonds that mature in 2018, at the time of writing, but positions may change at any time.

 

Another AMD Comeback: Stock Says Most Certainly Yes, But I’m Skeptical

At first glance you might very well think Advanced Micro Devices (AMD) is having a hugely successful rebirth. Here is two-year chart of the semiconductor company’s stock price:

After so many fits and starts and promises over the last few decades, with little to show for it in the way of sustainable profitability, I had not really looked closely at the shares, even during this huge run recently. Then I read an article in the July issue of Fortune that spotlighted AMD’s bet on new chips that apparently has gotten investors’ attention.

For a company whose annual revenue in 2015 and 2016 ($3.99 billion and $4.27 billion, respectively) were the lowest out of any of the past ten years, AMD’s current market value of $13.5 billion (today’s share price: $14.39) seemed pretty lofty, but I wanted to dig deeper to see if progress is really being made. The numbers are pretty ugly:

The aforementioned revenue trend is poor:

And profitability is hard to come by. Here is free cash flow over the last decade:

Okay, “hard to come by” might be overly generous… AMD has not turned a material cash profit, after required capital expenditures, in any of the past 10 years. Looking at the two-year stock price chart again, it is hard to understand why the share are trading above $14 each.

Evidently, optimism about future products is high, despite some clear setbacks as noted in the Fortune piece. But I suspect the stock may be ahead of those rosy expectations. Including half a billion dollars of net debt, investors are currently valuing AMD at $14 billion. Revenue is expected to reach $5.3 billion in 2018 (sell side consensus estimate), which would get the company back to 2012-2014 sales levels.

So what is a best case for AMD? I decided to try and pinpoint a number in order to draw a final conclusion about the current stock market valuation. To do this I like to assume that most metrics get back to previous peak levels and see what kind of stock price I would get if things go right from here. Call it the “bull case” as many analysts do.

Using the last decade as my data set, I see that gross margins peaked in 2010 at 46%. R&D spending troughed at 19% in 2014. Corporate overhead troughed at 11% last year. Let’s plug in those expense levels (equating to EBITDA margins of 16%) and further assume that AMD can get annual revenue back to $6 billion (40% above 2016 levels and 12.5% above consensus estimates for next year). In that scenario annual EBITDA would come in at $960 million. Let’s call it a billion.

What multiple should we use on that $1 billion of EBITDA? Industry behemoth (and the competitor AMD has never been able to strongly challenge), Intel, trades at 7 times. If we give AMD the same valuation the equity would be worth $6.5 billion, or roughly $7 per share. Even if we are generous and assign a 10x EV/EBITDA multiple, we only get to $10 per share.

At over $14 per share, AMD stock currently reflects very optimistic assumptions about the company’s future growth, profitability, and valuation ($1.4 billion in annual EBITDA, at a 10 multiple, for instance). If the last decade is any indication, the odds are not great that they deliver. As a result, I am not touching the stock. In fact, for those who short overvalued and underwhelming businesses, it might be a solid candidate.

Full Disclosure: No position in AMD at the time of writing, but positions may change at any time

 

The Door Is Open For Somebody To Swoop In And Steal Whole Foods Market

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.