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Amazon’s $13.7 billion Acquisition of Whole Foods


Overview of the deal

  • Acquirer: Amazon

  • Target: Whole Foods Market Inc.

  • Deal value: $13.7 bn

  • Announcement date: 06/17

  • Acquirer Advisors: Goldman Sachs

  • Target Advisors: Evercore

Amazon, the world’s largest online retailer, is expanding into brick and mortar food retailing with the acquisition of Whole Foods. This move is part of Amazon’s broader plan to diversify their current business interests and leverage their huge network of loyal customers, especially those with Amazon Prime subscriptions, to expand into multiple different markets. We have seen previously expansion into online video streaming, various cloud computing services and even a venture into healthcare.

This acquisition will be Amazon’s first move into the supermarket industry and will look to shake up an already low-margin, high competition industry. Having already caused a paradigm shift in bookselling, retailing and newspapers by incorporating modern-day technology into these industries, Amazon has a good track record to take on the challenge of implementing similar changes into the supermarket industry. Whole Foods has its USP on their organic products, which will appeal to health-conscious millennials for the most-part, but this could pose an issue for national expansion if these products are not adopted by the mass market.

“E-commerce is soaring and food-delivery businesses are taking off because human beings are fundamentally lazy and they don’t want to leave the couch to buy stuff.” -The Atlantic

Company details (Amazon)

Amazon is an American emerging conglomerate whose main product offerings are electronic commerce and cloud computing. Amazon is the largest internet retailer in the world by revenue and market cap.

- Founded in 1994, headquartered in Seattle, Washington

- Chairman, President and CEO: Jeff Bezos

- Number of employees: 566,000

- Market Cap: $815 bn - EV: $815.4 bn

- LTM Revenue: $193.2 bn - LTM EBITDA: $18.5 bn

- LTM EV/Revenue: 4.1x - LTM EV/EBITDA: 42.6x

Company details (Whole Foods Market Inc.)

Whole Foods is an American supermarket chain whose USP is organic food products. They have 479 stores across North America and the United Kingdom.

- Founded in 1980, headquartered in Austin, Texas

- CEO: John Mackey

- Number of employees: 91,000

- Market Cap: N/A - EV: $13.7 bn (Assumed from deal value)

- LTM Revenue: $15.9 bn - LTM EBITDA: $1.2 bn

- LTM EV/Revenue: 0.86x - LTM EV/EBITDA: 11.4x

Projections and assumptions

  • Short-term consequences

Amazon has agreed to pay $42 per share in an all cash deal, which represents a 27% premium. John Mackey, Whole Foods’ co-founder and current CEO will continue to run the business. Amazon side-steps the time consuming challenge of building its own physical footprint.

Amazon gains access to over 470 stores across the US and also a presence in the UK, which looks to provide the ability for quicker regional grocery delivery. This physical presence will make the widespread takeoff of Amazon Prime Pantry, Amazon’s existing grocery delivery service, much more feasible as some say this could theoretically allow “5-Minute delivery”. For now they are testing 2-hour delivery.

Amazon is utilising their brick and mortar presence through selling amazon products in Whole Foods stores (Amazon Echos and Echo Dots), but more importantly they are rapidly integrating Amazon services with Whole foods. For instance, Amazon credit-card holders now get 5% cash back at Whole Foods, further Prime is to be integrated into the Whole Foods reward system, including special Prime member discounts and deals. Amazon lockers are also to be rolled out into stores to further integrate prime delivery services into Whole Foods, increasing Amazon customers need to visits Whole Foods.

  • Long-term upsides

Whole Foods allows Amazon to test various new disruptive technologies and strategies on brick and mortar venues before rolling them out to the commercial market (or, if successful enough, keeping them as a USP). One clear benefit would be in the current 2-hour delivery model that effectively makes Whole Foods a depo for groceries. However one of the most anticipated is Amazon Go, recently opened in Seattle in undergoing its own trial period - if deemed successful this would be a huge innovation for the entire supermarket industry and could boost Whole Foods among the largest players in the market.

Over the long term we could see Amazon utilise their newfound data source to exploit the food and grocery market even further. This is a self-fulfilling cycle as Amazon is best poised to learn about consumer trends through their immense data collection and analytics ability, then cater increasingly towards these trends thus attracting more customers, thus collecting even more data. This fortuitous cycle could spring Whole Foods to among the top US supermarkets.

Do note that over 70% of the $13.7bn (roughly $9bn) Amazon paid for Whole Foods was attributed to “Goodwill” because this investment was made for its longer term potential and gateway into the supermarket industry. Amazon is looking to position itself as a “life bundle”, meaning that a subscription to Prime gives access to a fleet of diverse “life” services.

Risks and uncertainties

Critics of Amazon’s strategy of moving into the grocery market say that it is a “terrible, low margin business” which is in all regards true, but we must remember that ecommerce was also in this state and Amazon succeeded through unthinkable modernisation and innovation. It is the opinion of Amazon, and many supporters, that it will do the same again.

Whole Foods is an underperforming asset, with profits falling since 2012, thus it requires drastic reforms to turn around. Amazon has already integrated it with Amazons existing consumer network quite effectively and has implemented huge price cuts across all of its stores, some up to 40%. Price cuts present the greatest risk because it threatens to alienate the high-end, richer customers that Whole Foods has successfully appealed to.

It is worth noting that this acquisition indicates, along with the recent venture into healthcare with J.P.Morgan and Berkshire Hathaway, Amazon’s huge expansion appetite for new industries. Despite their success thus far there has been a very heavy reliance on technological innovation especially in organisation and delivery ability. Some fear is flaring that Amazon is expanding too quick to maintain this level of technological development to remain ahead in all these new industries.

“This is about more than just supermarkets—this impacts all of retail.” -Forbes

© The MergerSight Group. 2018. All rights reserved.


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