Amazon to Buy Whole Foods for $13.7 Billion -- 7th Update

By Laura Stevens and Annie Gasparro

Amazon.com Inc. said on Friday it would buy Whole Foods Market Inc. for $13.7 billion, including debt, instantly transforming the online giant into a major player in the bricks-and-mortar retail sector it has spent years upending.

The acquisition, Amazon's largest by far, gives it a network of more than 460 stores that could serve as beachheads for in-store pickup and its distribution network. It would make Amazon an overnight heavyweight in the all-important grocery business, a major spending segment in which it has struggled to gain a foothold because consumers still largely prefer to shop for food in stores.

In its drive to conquer consumer spending, Amazon has ventured far from its roots as an online book seller. It is developing its own delivery network, and has become a significant video content creator and cloud data service provider.

Its Whole Foods deal is a blow to other retailers, notably Wal-Mart Stores Inc., which derives more than half of its sales from groceries and is struggling to compete online. Traditional grocers such as Kroger Co. and Albertsons Cos. have been battling volatile food prices, lackluster consumer spending and stiffer competition from deep discounters, online merchants and a plethora of other places to purchase food.

Retail stocks including Wal-Mart, Target Corp. and Costco Wholesale Corp. sank. Amazon shares were up more than 2% to $987.71 at the close, near its record high.

"Amazon views grocery as one of the most important long-term drivers of growth in its retail segment," writes Colin Sebastian, a Robert W. Baird analyst. The acquisition gives Amazon a scale and density "that otherwise would have taken years to build out."

The deal came together in the past month, just after Whole Foods announced an overhaul of its board of directors, according to people familiar with the deal. The process was influenced by Amazon's own plans to build out a network that would have competed against Whole Foods, the people added.

Amazon will pay $42 a share for Whole Foods, valuing the grocer at a 27% premium to its closing price Thursday, or $13.7 billion including debt. The deal is expected to close in the second half of this year.

Mutual-fund giant Neuberger Berman, which owns some 2.7% of Whole Foods, and activist hedge fund Jana Partners LLC, with roughly 8.2%, had been pressing the retailer to add directors experienced in retail operations, technology, finance and real estate, and to consider a sale.

Neuberger portfolio manager Charles Kantor said Amazon's bid could be topped by grocery companies worried about new competition. "It's not a big check," he said in an interview. "I would be very surprised if this is the final chapter of Whole Foods."

Acquiring Whole Foods is strategic for Amazon, a way to quickly grab a bigger portion of the estimated $674 billion U.S. market for edible groceries, according to consulting firm Kantar Retail. Until now, Amazon has largely focused its grocery efforts around its Amazon Fresh subscription service, which promises quick delivery of online food orders.

Analysts said they expect Amazon eventually to use the stores to promote private-label products, integrate and grow its artificial-intelligence-powered Echo speakers, boost Prime membership and entice more customers into the fold.

Online grocery shopping is logistically complex, often requiring fast delivery of cold items as part of large orders on routes where stops are spread far apart. And many consumers still prefer to touch, smell and pick out fresh items like fruits and vegetables for themselves.

Online shopping accounted for 2% of grocery sales last year, according to Kantar. Before Amazon's announcement, that share was projected to grow to 3% by 2021. Amazon's food-and-beverage grocery market share was estimated at 1.1% last year, compared with 1.7% for Whole Foods, according to Cowen.

Now Amazon has to combine two distinct corporate cultures and leverage its full-scale entry into bricks-and-mortar retailing. Largely a hands-off manager of smaller acquisitions like Zappos.com, Amazon is likely to take a more active role in Whole Foods, Macquarie analyst Ben Schachter said.

Whole Foods has come under fire as traditional grocers offer more natural and organic items, which are Whole Foods' mainstay. Its shares had lost nearly half their value since a 2013 peak, and sales at stores open at least a year had slumped.

At first, the two retailers don't seem like an immediate match. Amazon is a low-price leader, while Whole Foods is a premium offering. Whole Foods' operating margins, at 5.5%, are higher than those of Amazon's North American retail business at 3%, Citi analysts note. The combined companies would be the fifth-largest U.S. grocery retailer by market share, according to an analysis by Cowen, behind Wal-Mart, Kroger, Costco and Albertsons/Safeway.

John Mackey will remain chief executive of Whole Foods; stores will operate under that name and maintain their suppliers, Amazon said in a press release. Amazon Chief Executive Jeff Bezos said the company is "doing an amazing job and we want that to continue."

David Benoit and Austen Hufford contributed to this article

Write to Laura Stevens at laura.stevens@wsj.com and Annie Gasparro at annie.gasparro@wsj.com

(END) Dow Jones Newswires

June 16, 2017 19:49 ET (23:49 GMT)

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