Whole Foods to Buy Wild Oats for $565 Million

AUSTIN, Texas - In a surprise move, Whole Foods Market here is fighting back against the mainstream grocery chains, supercenters, and specialty operators that have moved in on its natural turf by moving to acquire its leading super-natural direct competitor, Boulder, Colo.-based Wild Oats Markets.

Whole Foods said yesterday it agreed to buy Wild Oats in a cash tender offer of $18.50 per share, or approximately $565 million.

Whole Foods will also assume Wild Oats' existing net debt totaling approximately $106 million, bringing the transaction enterprise value to about $700 million. The transaction is expected to close in April, the two companies said.

"We're competing in a highly competitive market," Whole Foods' chairman, c.e.o., and co-founder John Mackey said yesterday during a conference call after the merger announcement. "Safeway, Kroger, Supervalu, and Wal-Mart are massive companies bigger than Whole Foods that are selling some of the same products." Mackey also cited Trader Joe's as a "formidable competitor" that often flies under the radar but has grown its store count to 270 in recent years.

Mackey characterized the merger as a defensive counterstrike. "This deal is in the best interest of Wild Oats' shareholders and Whole Foods' shareholders," he said. "We need each other."

The deal, if approved by the U.S. Securities and Exchange Commission, would bring Whole Foods' total store count to around 300 units. It would allow it to enter several new markets and gain critical mass in three regions where its presence is currently the smallest: the Rocky Mountains, the Pacific Northwest, and Florida.

All of Whole Foods Market's 11 operating regions would gain stores in the transaction.

Whole Foods is hoping for synergies through G&A cost reductions, greater purchasing power, increased utilization of support facilities, and new team member talent.

It said it plans to evaluate each of Wild Oats' four banners, as well as each store, to see how they fit into the Whole Foods overall brand and real estate strategy. The retailer said it expects to have to close some stores, and to make significant investments in remodeling before eventually re-branding the Wild Oats stores as Whole Foods Markets.

"We think we can help Wild Oats improve even more and get their comps in the double digits," Mackey said.

On the merchandising front, he said he sees the company's greatest opportunities in improving Wild Oats' perishables selection, including produce, meat and seafood, bakery, and prepared foods.

Conventional supermarket operators that compete with Whole Foods and Wild Oats told Progressive Grocer the acquisition would likely spur a new level of competitive pressure in many geographic areas, as well as in the battle to capture growing sales in natural and organic food.

"[Whole Foods] is a lot tougher competition than Wild Oats," Rudy Dory, owner of Newport Avenue Markets, Bend, Ore. told Progressive Grocer. "They're better in fresh and in merchandising. It will definitely force us to do our jobs that much better."

Paul Howland, buyer-merchandiser for Chandler, Ariz.-based Bashas' Natural Choice departments, meanwhile, lamented the loss of an industry pioneer.

"For us old natural foods guys, it's kind of sad in a way," Howland said. "Wild Oats was a pioneer in many respects, but clearly their performance had been suffering recently."

Howland predicted that, its major eminent expansion notwithstanding, Whole Foods will not have much room to increase its buying power in such a margin-squeezed industry. However, he noted that the retailer is in a solid position with regard to distribution, thanks to its seven-year primary distribution agreement with United Natural Foods, Inc.

Meanwhile, smaller to mid-size organic and natural foods retailers could actually benefit from the deal, Howland said, if consumers who oppose big business begin to see Whole Foods as the industry's new bully.

Whole Foods is certainly no stranger to acquisitions; the retailer has made 18 retail buys in its history. Still, the Wild Oats acquisition will be Whole Foods' biggest.

Mackey said it generally takes Whole Foods up to two years to absorb an acquisition, including integrating the acquired operation into its decentralized structure and implementing its incentive programs.

"We expect this acquisition to be similar, and that over time we will recognize significant synergies," he said.

During yesterday's conference call, Mackey admitted that Whole Foods had sniffed around a Wild Oats deal at least once before. "The last time we looked into making a deal was six and a half years ago," he said.

This time, however, the stars seemed to align, as Wild Oats found itself searching for a new c.e.o. "I thought it would a good time to contact them, figuring that they may not have a strategic focus about where they wanted to go."

The transaction will be funded with $700 million of senior term loans, Whole Foods said. In conjunction with the transaction, Whole Foods also intends to upsize its long-term senior revolving credit facility to $250 million.

Wild Oats Markets' board of directors unanimously recommended that Wild Oats Markets' stockholders tender their shares in the offer. The Yucaipa Companies, Wild Oats Markets' largest shareholder with approximately 18 percent ownership, has committed to tendering its shares. Approval of the transaction by Whole Foods Market shareholders is not required.

The tender offer will expire within 30 days, subject to extension and to the receipt of customary regulatory approvals. Whole Foods currently expects to close the transaction in April.

Wild Oats, with annual sales of approximately $1.2 billion, was founded in Boulder, Colo. in 1987. The company currently operates 110 stores in 24 states and British Columbia, Canada under four banners: Wild Oats Marketplace (nationwide), Henry's Farmers Market (Southern California), Sun Harvest (Texas), and Capers Community Market (British Columbia).

Founded here in 1980, Whole Foods had sales of $5.6 billion in fiscal year 2006, and currently operates 191 stores in the United States, Canada, and the United Kingdom.
-- Jenny McTaggart, with additional reporting by Joe Tarnowski
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