News of Amazon’s huge $13.7 billion (bn) takeover bid for Whole Foods Market represents the largest US grocery deal over past decade and is leaving rivals in the retail sector quaking. It’s a big play by the retail behemoth in the US and yet another signal of the seismic shift in the market caused by their model.
Despite shares in Amazon rising some 3% in the wake of the deal being announced today for Whole Foods, which saw its share price shoot up almost 30% early doors, one wonders whether the success of Amazon might actually prove bad for your investment portfolio overall after its rivals saw their share prices impacted.
But that of course assumes one had invested across the board in other retailers and not solely in Amazon stock.
The deal, which is equivalent to $42 a share for Whole Food that was founded in 198o in Austin, Texas, would see Amazon assume a retail business with a footprint of around 460 stores – mostly in North America the US but also with a handful of outlets in the UK.
It provides a supermarket chain that exclusively features foods without artificial preservatives, colors, flavors, sweeteners, and hydrogenated fats. Some commentators saw the move as a “no-brainer slam dunk”, given that Amazon has filled one of its biggest holes by having landed a major grocery chain.
The announcement caused carnage today on the stock market among retailers with the big US retailers being pummelled. Wal-Mart was down 6% and Target relinquished 10% on the announcement, while Costco fell 8% and Kroger declined plunged 15% in early trading.
Neil Wilson, a senior markets analysts at brokerage ETX Capital in London remarked: “It’s fair to say there will be crisis board meetings at these companies after this move. Amazon shares jumped 3% on the deal, although it remains shy of its all-time peak.”
Whole Foods’ stock surged by 27% – up $8.88 to $41 .95 – in afternoon trading in New York. Amazon shares were trading on NASDAQ up $28.24% (+2.93%) at $992.41 a pop at 1.30pm EDT. Since the start of the year the stock has risen an impressive 31.6% from $753.67.
Amazon looks set to dominate the food sector now just as much as it does the non-food arena. It brings huge scale, pricing power and clout that will make life much tougher for rivals, if it hadn’t been so already. That said, it might well spur other retailers into considering tie-ups to defend their positions.
Signs for Amazon Go are seen outside the grocery store’s location on June 16, 2017 in Seattle, Washington. Amazon announced that it will buy Whole Foods Market, Inc. for over $13 billion. (Photo: David Ryder/Getty Images).
But there are increasingly serious anti-trust concerns. One has to ask how long it will be until Washington takes note of what is going on and as the London-based Scottish analyst Wilson remarked “clamps down.” Time will tell on that score.
Across the Pond, stocks in UK supermarkets were also falling on the back of the Amazon announcement. British retail big hitters Tesco and J. Sainsbury’s both dipped about 3% on the news and Morrisons also slipped more than 1%.
At the open in London, Tesco shares had risen 1% after a fairly upbeat trading update defied some of the rather gloomy data we have witnessed for on UK retail scene – falling sales, rising inflation, falling real wages and a dire trading update from DFS during the week.
Whole Foods has just nine stores in Britain, so the impact on Morrisons, which has its own tie-up with Amazon, should not be too significant. It might be able to support Morrisons, if it signals how Amazon might be able to help it grow its market share.
According to M&A research and intelligence firm Mergermarket, Consumer M&A globally has already surpassed last year’s total deal value, with this year’s figure standing at $237.7bn. That is a 9.4% increase on the $217.4bn chalked up in 2016.
Jonathan Klonowski, Research Editor (EMEA) at Mergermarket commenting in the wake of this latest deal, said: “Following a lacklustre year in 2016, consumer M&A continues to hit new heights and Amazon’s acquisition of Whole Foods is the latest in a long line of big-ticket deals in 2017.”
Indeed, just a single consumer mega-deal worth more than $10bn was announced last year. Amazon’s takeover of Whole Foods becomes this year’s sixth according to Mergermarket’s data.
US Grocery & Retail M&A
Looking the M&A stats, as well as being the top grocery deal in the US over the last 10 years, the Amazon/Whole Foods transaction is the fourth-largest US deal in the Retail sub-sector on Mergermarket’s record, which goes back to 2001. The deal by itself has accounted for 57.7% of the Retail sub-sector’s total deal value year to date.
And, the deal has further boosted the overall Consumer sector, which is the top industry so far this year, witnessing 202 deals worth a total of consideration of $127.3bn. Of this, Retail accounts for 18.4% of the sector’s value.
The transaction stands as the second-largest US grocery deal on record by the market intelligence firm’s numbers after Cerberus Capital Management, CVS Health Corp, and SuperValue bought out Albertsons back in 2006 for a consideration of $17.4bn.
US Retail M&A year to date has reached 53 deals worth $23.4bn, which is 432% up in value – or more than 5x (times) – the sub-sector’s total deal value compared to corresponding period last year.
Top Consumer M&A Deals – 2017
Target Bidder Deal Value
Reynolds American Inc. BAT Plc $60.7bn (57.83% stake)
Luxottica Group S.A. Essilor International $25.4bn
Essity Aktiebolag (publ) Svenska Cellulosa $19.3bn
Mead Johnson & Co. Reckitt Benckiser &nb sp; $17.8bn
Whole Foods Market, Inc. Amazon.com, Inc. $13.5bn
Source: Mergermarket. Note the Amazon/Whole Foods deal is valued at $13.5bn, which is calculated taking into account net debt.
Structural changes within in retail have put signficant pressure on ‘brick-and-mortar’ supermarket chains in recent years. And, given changing consumer habits and the rise of e-commerce in the bourgeoning grocery and meal-kit delivery space, an uptick consolidation in the food retail industry is hardly surprising.
Amazon and Walmart’s increased competition following the latter’s purchase of Jet.com last year was “just the beginning of the fight for market share” posited Mergermarket.
The research firm envisaged “further M&A opportuniti es expected as assets become available amidst increasing competition, store closures, and bankruptcies.” The firm noted that “the future of brick-and-mortar chains becomes cloudier” as the likes of Amazon and e-commerce upstarts continue to change the way people consume products.
Even Walmart and Target have started to adopt aggressive e-commerce strategies, which maybe spurred on some of Amazon’s desire to purchase Whole Foods, whilst also offering groceries alongside their usual personal and home products in their own efforts to survive.
Amazon indicated that it wants to operate Whole Foods independently. But however it operates it will no doubt provide another channel for sales of Amazon books, gadgets and whatever else they seek to sell. But one wonders what else the retail giant under Jeff Bezos will be acquiring next in their land grab – in the US or internationally.