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Stock Ideas Investors Daily Edge M&A Activity: Whole Foods Acquisition of OATS May Not Prove a “Goldmine”
Stock Ideas Investors Daily Edge M&A Activity: Whole Foods Acquisition of OATS May Not Prove a “Goldmine” 
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| M&A Activity: Whole Foods Acquisition of OATS May Not Prove a “Goldmine” |
| Friday, 17 August 2007 | ||||||||
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Let’s hope Wild Oats Markets (OATS:NASDAQ) is given the go-ahead to be acquired by Whole Foods Markets Inc. (WFMI:NASDAQ), because it’s already in major trouble. OATS announced a net income of only $126,000 during the second quarter, down 97% from the $4.9 million it made during the second quarter in 2006. That’s net income of a little over zero cents per each share of 29.9 million shares. “Higher operating income” is cited as hurting the OATS’ numbers. According to a recent study by Research and Markets, the organic food market grew 13.6% in 2006 to an amazing $36.7 billion. And projections for the organic food market show a possibility of sales up to $67.1 billion in 2011, an increase of 83% from last year’s numbers. What’s more, the largest organic food market is in the Americas, which accounts for 49.7% of total worldwide sales! For a company that runs more than 110 storefronts in a growing organic food market in 24 states around the country (plus one in British Columbia), I wondered how a company that makes more than $1 billion in sales a year could do so poorly. So I looked into it. Interestingly enough, OATS has yet to post its “official” earnings release on its Web site. So I haven’t yet seen the specifics, but I’ll let you know when I do. I’m intent on putting this puzzle together. It just doesn’t make any sense. Whole Foods Markets Inc. (WFMI:NASDAQ) is surely getting a fantastic deal on OATS if the market continues to grow to projections. Its bidding price of $565 million for OATS is only a little more than half of what the company makes on an annual basis and only 5.9% of the profit projections in the organic food market in the Americas (where OATS is located) by 2011. (The deal would allow WFMI to pay $18.50 per share of OATS stock, which is currently trading at $15 per share. This would allow a premium of 23% for current shareholders still keeping their fingers crossed.) Yesterday, however, was the last day for Whole Foods’ extension of its tender offer for OATS, the fifth successive date filed by the company as the entire deal is scrutinized by the Federal Trade Commission, which holds the view that WFMI’s attempt at cornering the organic food market is anticompetitive and could prove especially harmful to consumers, who are already seeing high (and still rising) costs on food. John Mackey, the blogging CEO of WFMI that said some less than desirable things about OATS -- he even declaring that it would eventually go bankrupt -- says that the acquisition is meant to prevent pricing wars between WFMI and OATS while the organic food market continues to blossom here and abroad. Well, that sure is interesting, considering the FTC revealed WFMI’s dirty little marketing strategies Tuesday in court, including the scandalous news that Whole Foods negotiates with food suppliers to drive up costs for Wal-Mart Stores Inc. (WMT:NYSE). It sets “ground rules” to bar suppliers from selling directly to WMT, forcing the retail giant to pay higher costs to distributors. These secrets were found by the Associated Press before the electronically filed documents by the FTC were “redacted,” which simply means they were edited to take out confidential information.
While the WFMI deal with OATS could possibly double revenue sales of some WFMI stores, the pre-confidential document noted that the opening of a Whole Foods store near a Wild Oats Market cut some 30% of its competitor’s revenue. The most scandalous bit of information, at least in my opinion, comes in the form of some WFMI corporate documents titled “Project Goldmine” shows that buying OATS, and then closing specific stores (the plan may have been 30 or more OATS storefront closings) will increase the revenue of a nearby Whole Foods store by 85% to 90%. Of course, OATS is working with WFMI to get the deal approved from the FTC… and consumer groups like the Consumer Federation of America, the American Antitrust Institute, and the Organization for Competitive Markets oppose the deal. As of today, and closing arguments, it’s all in the FTC’s hands. And I think you’ll join me in saying that it doesn’t look so good. Ann Source : TFN
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