- Amazon will offer $42 a share in cash for Whole Foods, in a $13.7 billion deal including debt.
- The purchase is subject to approval by shareholders and regulators, and is expected to close in the second half of 2017.
- The announcement shook the retail sector: shares in other chains fell the same day on the prospect of Amazon as a competitor.
On 16 June 2017 Amazon announced an agreement to buy the US organic food supermarket chain Whole Foods Market. It will pay $42 a share in cash, a premium of around 27% over the previous day’s closing price. The deal values the company at $13.7 billion, including its debt. Chief executive John Mackey will stay at the helm and the headquarters will remain in Austin, Texas.
The market reacted at once. Whole Foods shares rose nearly 29% at the close and Amazon’s gained 2.4%, while those of other chains with a strong food presence, such as Walmart, Target, Costco and Sprouts, fell. It is Amazon’s largest acquisition to date and marks a significant step by a company born on the internet towards physical stores.
How such a deal works
A cash offer for all shares, at a premium to the market price, is the usual way to buy a listed company with the board’s agreement. The announcement is only the first step. The deal must be approved by the target’s shareholders and by competition authorities, which examine whether the concentration could harm consumers or competitors. Until then, both companies keep operating separately.
Agreements of this kind include closing conditions, deadlines and often commitments each party must meet while the deal is processed. That is why the expected timetable, the second half of 2017, is an estimate and not a guarantee: it depends on regulators raising no objections or imposing conditions. For deals of this size, authorities review the affected markets in detail.
What it shows about retail
The purchase joins e-commerce with a network of physical food stores, a sector where online sales were still modest compared with in-store purchases. For traditional retail, the message is that big digital players seek to gain a presence in fresh food, which requires logistics, a cold chain and proximity, and that the border between physical and online commerce is blurring.
For suppliers and producers, a change of owner at a large customer can mean new commercial terms, new payment periods and different selection criteria. For competitors, it creates a stronger incentive to improve their own digital offer or seek alliances. The real effects will depend on how both companies evolve, and for now one can only make hypotheses.
What to review
Companies that depend on a large customer, a platform or a retail chain can use news like this to review their sales concentration and the clauses of their contracts: duration, exclusivity, change-of-control conditions, payment periods. A change of owner at the customer may open the possibility of renegotiating, but also of losing volume if its strategy changes.
Anyone with a business in retail or logistics can also ask what share of their sales is already online and how delivery is organised. Investment or acquisition decisions should rest on one’s own analysis, not on others’ deals. This note is general information and not a recommendation to buy or sell any security.
When a digital giant buys a chain of stores, the whole of retail rethinks where its boundary lies.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
