Whole Foods finally gets go-ahead on deal

AUSTIN, TEXAS —Whole Foods has made its point. The U.S. Court of Appeals for the District of Columbia has cleared its merger with Wild Oats Markets. The court denied the Federal Trade Commission’s request for a stay to preclude the closing of the merger pending a commission appeal and has dissolved an Aug. 20 administrative injunction that had precluded the transaction from going forward.

Whole Foods entered into a merger agreement with Wild Oats on Feb. 21, but on June 6, the FTC filed an antitrust suit in the federal district court to block the proposed acquisition on the grounds that the merger would impact competition in what it defined as the premium natural and organic retail channel. FTC won a temporary restraining order, but the district court rejected its arguments, leading to the failed move to the appeals court.

In the end, the FTC couldn’t get the courts to buy its premise that Whole Foods and Wild Oats represented a separate trade channel and that their merger would have penalized natural and organic food purchasers. Acceptance of that premise might have been troubling for retailers, as it would have empowered the FTC to establish its own retail channel designation and block mergers and acquisitions using a fresh set of criteria.

As of Tuesday, Aug. 28, the $565 million dollar merger was complete. Whole Foods Market purchased 84.1% of Wild Oats Markets’ outstanding common stock in a cash tender offer of $18.50 per share, and within the week will purchase as delivered approximately 12.7% of the outstanding shares of Wild Oats common stock, represented by the shares subject to guaranteed delivery. Whole Foods will acquire all of the remaining outstanding shares of Wild Oats common stock pursuant to the short-form merger procedure available under Delaware law. Whole Foods also has assumed existing debt, net of cash, totaling approximately $137 million. It has entered into a five-year, $700 million senior term loan agreement to fund the transaction, and has signed a new five-year, $250 million revolving credit agreement, which will replace its existing $200 million revolver.

For his part, John Mackey, Whole Foods chairman, ceo, and co-founder stated: “Wild Oats Markets and Whole Foods Market have both had a large and positive impact on the natural and organic foods movement throughout the United States, leading the industry to nationwide acceptance and helping it become one of the fastestgrowing segments in food retailing today. Our companies have similar missions and core values, and we believe this merger will create long-term value for our customers, vendors and shareholders, as well as exciting opportunities for our new and existing team members.”

All of Whole Foods’ 11 operating regions will gain stores, with three of its smallest regions gaining critical mass. Whole Foods will gain immediate entry into a significant number of new markets and will evaluate each store to see how it fits into its overall brand and real estate strategy. Wild Oats Markets has been rationalizing its store base over the last several years to shed underperforming stores, but some additional store closures are expected, as is the relocation of some stores that overlap with Whole Foods stores currently in development. Whole Foods expects to make significant investments in upgrading and improving stores before eventually re-branding them as Whole Foods Market stores.

Approximately $3.8 million in direct acquisition-related costs had been incurred by Whole Foods Market through July 1. These costs, along with any additional acquisition-related costs incurred since that time, will be capitalized as part of goodwill.

For Joseph Agnese, a Standard & Poor’s analyst, the merger also is a positive, at least for Whole Foods. He said, in a research note, “We continue to view the about-$700 million acquisition favorably based on our expectation of benefits from the removal of a competitor, entrance into new markets and sharing of best practices. As a result, we are increasing our 12-month target price by $4 to $50.”