Wild Oats Acquisition Continue With Organic or Traditional
NEW YORK (MarketWatch) -- Natural-foods grocer Whole Foods Markets Inc. on Wednesday said that it agreed to acquire smaller rival Wild Oats Markets Inc. for about $565 million, beefing up its store base as it grapples with competition from larger conventional supermarkets.
Under the terms of the deal, Whole Foods said that it would pay $18.50 in cash for each share of Wild Oats stock. The offer is nearly an 18% premium on Wild Oats' closing share price of $15.72 on Wednesday. Whole Foods WFMI also will assume $106 million in Wild Oats OATS debt.
Whole Foods also backed its yearly same-store sales forecast of 6% to 8% growth.
Whole Foods stock rose more than 5% to $48.08 in after-hours trading, while Wild Oats shares soared more than 17% to $18.43 after being halted.
The popularity of organic and natural foods has helped drive shoppers to so-called "supernaturals" Wild Oats and Whole Foods, but competition coming from several directions -- such as Trader Joe's outlets, conventional supermarkets such as Safeway Inc. SWY and Kroger Co. KR,
Wal-Mart, in particular, has aggressively rolled out organic food, clothing and other products and has promoted its discount prices.
"The growth opportunity in this category has led to increased competition from many players, most of whom are not dedicated natural- and organic-foods supermarkets, but are considerably larger than we are," Whole Foods Chairman and Chief Executive John Mackey said.
Whole Foods is no stranger to snapping up smaller rivals, many of which drove its brisk growth, but Wild Oats will be its largest acquisition. With the deal, it will gain a strong presence in three of its smallest regions: the Pacific Northwest and Rocky Mountain regions, as well as Florida.
"As the natural- and organic-foods industry continues to receive attention from larger conventional players, the timing for our two companies to join forces could not be better," said Gregory Mays, chairman and CEO of Wild Oats Markets. "We believe this strategy is in the best interest of our stakeholders, and our board of directors has unanimously recommended that Wild Oats stockholders tender their shares in this offer."
Whole Foods has been struggling with slow same-store sales, a tough pricing environment and the slumping housing market, which may have cut down on the number of consumers opting to trade up to higher-end groceries. CEO Mackey even cut his salary this year to $1 and said he would forgo any future compensation stock-option awards.
"Conventional grocers have been providing stiffer competition to the supernaturals," said Michael Krestell, an analyst with M Partners in Toronto. "We see it as a quick way for Whole Foods to solidify their leadership position. ..."
"Given that the conventional retailers are trying to make more and more headway into the natural organic space, this could be seen as somewhat of a defensive move as well," he said.
Absorbing Wild Oats
On a conference call with analysts, Whole Foods said it looked at making a deal with Wild Oats about six years ago, but the timing was right now.
"We tried to pay the lowest price possible and they tried to get the highest price possible and we compromised on it," Mackey said. "We had seen continued operating improvement by Wild Oats in the last few years. These guys were definitely getting better. They were getting to be a stronger competitor, they were doing a much better job ... we thought it was a good time to take a look at it."
The two companies have significant duplication in overhead and corporate officers, Mackey said, which will help in cost-cutting as the deal is integrated over the next two years.
"We can put jet propulsion under a lot of the stores in the next year or two, and get a lot of those comps (same-store sales) into the double digits," Mackey said.
Wild Oats has seen some shuffling of its top management and said Mackey said the company was in transition and it was a good time to approach the company. The integration of the deal could make results "a little bit messy" for a quarter or two," but the synergies from the deal will appear in a year.
The transaction, which is expected to close in April, will be funded at closing with $700 million of senior term loans, Whole Foods Market also said it plans to increase its long-term senior revolving credit facility to $250 million.
Boulder, Colo.-based Wild Oats has annual sales of about $1.2 billion. It operates 110 stores in 24 states and British Columbia, Canada under the nameplates Wild Oats Marketplace, Henry's Farmers Market, Sun Harvest, and Capers Community.
Whole Foods will evaluate each banner as well as each store to see how it fits into its overall brand and real estate strategy. Wild Oats Markets has been pruning its store base over the last several years to shed underperforming stores, but some additional store closures are expected as well as the relocation of some stores that overlap with stores Whole Foods currently has in development.
Whole Foods said it expects to make significant investments in remodeling stores before eventually re-branding them as Whole Foods Market stores.
The tender offer is dependent upon at least a majority of the outstanding Wild Oats' shares being tendered, as well as customary regulatory and other closing conditions.
Ron Burkle's Yucaipa Cos. is Wild Oats' largest shareholder with about 18% ownership, and has committed to tendering its shares.
RBC Capital Markets is acting as financial advisor to Whole Foods in connection with the deal and has rendered a fairness opinion to its board of directors. RBC Capital is also serving as dealer manager for the proposed tender offer. RBC Capital Markets and J.P. Morgan will co-lead the debt financing, and J.P. Morgan, as administrative agent for the senior credit facility, will assist Whole Foods Market in seeking an amendment to boost the credit facility.
Citigroup is acting as financial advisor to Wild Oats Markets.
Slipping profits
The acquisition news comes as Whole Foods posted a decline in fiscal first-quarter profit.
The company said that net income fell to $53.8 million, or 38 cents a share, from $58.3 million or 40 cents a share in the year-ago period. The results include 7 cents a share in costs related to stock-based compensation.
Sales rose to $1.87 billion from $1.67 billion. Sales at stores open at least one year rose 7%, compared with growth of 13% in the year-ago period.
Analysts, on average, expected it to earn 41 cents a share on revenue of $1.89 billion, according to Thomson Financial.
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Source: https://www.marketwatch.com/story/correct-whole-foods-to-acquire-rival-wild-oats-for-565-million
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