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Whole Foods to Buy Wild Oats
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This is not a good move for the consumer of organic food.
Whole Foods Agrees to Buy Wild Oats; Profit Declines (Update6)
By Josh Fineman
Feb. 21 (Bloomberg) -- Whole Foods Market Inc., the largest U.S. natural-foods grocer, said it agreed to buy rival Wild Oats Markets Inc. for $565 million after reporting its first profit decline in five quarters.
Whole Foods will pay $18.50 in cash for each share of Boulder, Colorado-based Wild Oats, 18 percent higher than its closing price today. First-quarter net income fell 7.8 percent to $53.8 million, or 38 cents a share, Austin, Texas-based Whole Foods said today. Earnings missed analysts' estimates.
Buying Wild Oats will help counter slowing growth at Whole Foods, which faced competition from Safeway Inc., Trader Joe's and other grocery stores selling organic and prepared food. First-quarter sales at Whole Foods stores open at least a year rose 7 percent, down from 13 percent a year earlier.
``Whole Foods had won the size game and was able to call the shots,'' said Matt Patsky, portfolio manager at Boston-based Winslow Management Co. which overseas $350 million, including Whole Foods shares.
Wild Oats posted a loss in two of the past five years and its sales climbed 26 percent over the period to $1.12 billion, while Whole Foods doubled profit and sales.
Whole Foods said the purchase, its largest, will be funded with $700 million in loans. The company, which agreed to begin buying Wild Oats' outstanding shares on Feb. 27, anticipates the transaction to close in April.
``Wild Oats has improved their stores quite a bit in last few years, and we think we can help them improve even more,'' Chief Executive Officer John Mackey said on a conference call with analysts and investors. ``We can put jet propulsion under a lot of those stores in the next year or two.''
Store Gains
Shares of Whole Foods rose $2.40, or 5.3 percent, to $48.10 at 6:33 p.m. in extended U.S. trading. They declined 37 cents to $46.70 at 4 p.m. in Nasdaq Stock Market composite trading. Wild Oats shares jumped $2.71, or 17 percent, to $18.43.
Whole Foods will add 110 stores in 24 states and Canada's westernmost province of British Columbia. All of Whole Foods' 11 operating regions will gain stores, with three -- the Pacific Northwest, Rocky Mountain and Florida regions -- adding ``critical mass,'' the company said in a statement.
Some Wild Oats stores will be closed and others that overlap with Whole Foods stores in development probably will be relocated, Whole Foods said. Mackey declined to say how many stores will be closed.
``Wild Oats has been waiting to sell to somebody for three or four years,'' Patsky said.
Buying Opportunity
The departure of former Chief Executive Officer Perry Odak in October and the subsequent departure of the company's chief financial officer created a buying opportunity, Mackey said on the call.
``The timing was right because of this strategic gap at Wild Oats,'' Mackey said. ``We thought it would be a good time to approach and it was.''
Whole Foods will cut significant costs from duplications in overhead with the purchase, Mackey said today on the call with investors.
``We think we will be able to improve the operations of the Wild Oats stores significantly, which will increase comps and sales,'' the CEO said on the call. The company first considered buying Wild Oats six years ago, he said. Mackey said he initiated the latest discussions with a call to Wild Oats' interim CEO Gregory Mays.
Missed Estimates
Net income in last year's first quarter was $58.3 million, or 40 cents. Earnings missed the 41-cent average estimate of 14 analysts surveyed by Bloomberg. Sales in the first quarter increased 12 percent to $1.87 billion from $1.67 billion, lagging the $1.89 billion average estimate of 10 analysts.
The company's biggest purchase previously was in 1996 when it bought Fresh Fields, at the time the second-largest U.S. natural foods chain with 22 stores. The company has made 18 acquisitions.
Whole Foods estimates it will take about two years to integrate the Wild Oats stores, Mackey said.
``A year from now we will definitely be seeing very good progress,'' Mackey said. ``It might take fully two years before you really see all the synergies begin to play out.''
Wild Oats was founded in 1987 with the purchase of Crystal Market, the only vegetarian natural foods store in Boulder, and grew partly through the acquisition of small health food stores.
Shares of Whole Foods tumbled 39 percent last year compared with a 22 percent gain for Kroger Co., the biggest U.S. grocery chain, and a 46 percent increase for Safeway, the third largest.
RBC Capital Markets served as Whole Foods' financial adviser and as the dealer manager for the proposed offer. RBC and JPMorgan Chase & Co. are co-leading the debt financing. Whole Foods wants to increase its long-term credit line to $250 million, for which JPMorgan will assist with finding an amendment. Citigroup Inc. is Wild Oats' financial adviser.
To contact the reporter on this story: Josh Fineman in New York at [email protected]
Last Updated: February 21, 2007 20:25 EST
[link to www.bloomberg.com]
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