Another challenging week for trading. The portfolio was up
for the week but the Amazon/Whole Foods acquisition was clearly a disruptor
deal for the market and for our portfolio.
Unfortunately, we were long Whole Foods (WFM) in the
portfolio but sold it the day before the acquisition announcement. We were also
long several food-based companies that suffered because of the news. In total,
we were stopped out of Hershey (HSY), Kraft, Heinz (KHC), US Foods (USFD) and
Mondelez (MDLZ).
What seemed like a brilliant move into consumer staples
stocks early in the week turned out to be a poor tactical move.
(Reuters) - Amazon.com
Inc said on Friday it would buy Whole Foods Market Inc for $13.7 billion, in an
embrace of brick-and-mortar stores that could turn the high-end grocer into a
mass-market merchant and upend the already struggling U.S. retail industry.
Amazon used aggressive
pricing to become an e-commerce retail juggernaut and has recently been
experimenting with brick-and-mortar outlets. It will take over a natural and
organic grocer pioneer with 456 stores, a mecca for young, high-end shoppers,
that has been struggling to rein in prices and integrate technology.
The deal represents a
dramatic turn in strategy for Amazon, which has offered food delivery through
its Fresh service for a decade but has not made a major dent in the $700
billion grocery market.
“The ramifications for
all of retail are seismic – not just retailers that sell grocery, but for
everyone,” Gordon Haskett analyst Chuck Grom said.
Shares of dozens of
supermarkets, food producers, payment processors and shopping malls
collectively lost at least $35 billion in U.S. market value on Friday as the
news reverberated across financial markets.
Shares of grocer
Kroger Co swooned 9.2 percent, while Wal-Mart Stores Inc fell 4.7 percent,
signaling fears that Amazon could broaden Whole Foods' product mix and cut
prices.
Amazon's shares rose
2.4 percent to $987.71, adding $11 billion to its market capitalization, which
in one sense makes the acquisition nearly free for Amazon shareholders.
"Supermarkets
will now have to contend with not only competition with each other and
non-traditional grocers like Wal-Mart Stores Inc and Target Corp, but with a
retailer like Amazon which has the financial capacity to price
aggressively," said Mickey Chadha, vice president and senior credit
officer at Moody's Investors Service.
Amazon agreed to pay
$42 per share in cash for Whole Foods, a 27 percent premium on the Austin,
Texas-based grocer's closing share price on Thursday.
But in a sign that investors
believe a rival bid is likely, Whole Foods shares rose above the offer price to
close at $42.68.
NO VALUE IN STATUS QUO
A former grocery
expert at Amazon predicted that the chain, nicknamed "Whole
Paycheck", would add a selection of discounted food and build out
non-grocery areas within stores, particularly for pharmacy and Amazon devices.
"There’s no value
in Amazon keeping the status quo at Whole Foods. Whole Foods was losing market
share to Kroger," said Brittain Ladd, who until earlier this year was a
senior manager working to roll out AmazonFresh globally.
"It’s pharmacy.
It’s having the ability to put stores that are similar to Apple stores inside
Whole Foods," he said.
Amazon has been
looking at shop layouts that could allow traditional in-store purchase, online
ordering with on-site pickup, and home delivery, using store warehouse space as
a distribution point, Ladd said.
Despite Amazon's
reputation for harnessing technology, a prototype store inside its corporate
office in Seattle, called Amazon Go, which uses sensors and tech-savvy cameras
to detect shoppers' selections and then charge their Amazon accounts, has
rolled out more slowly than planned, a person familiar with the matter said.
And while some
analysts expect Amazon to bring vast buying power to Whole Foods, Amazon's heft
in the food market is far smaller than in other areas, and high demand for
organic products gives farmers unusual bargaining power.
Amazon spokesman Drew
Herdener said plans do not include reducing jobs as the result of the deal and
that the company does not plan to automate Whole Foods cashiers jobs with
Amazon Go technology.
WHOLE FOODS WAS UNDER
PRESSURE
The deal unfolded
after Jeff Bezos, Amazon's chief executive officer, approached Whole Foods CEO
John Mackey about a month ago and received an eager response from Mackey, two
people familiar with the matter said.
The grocer will
continue to operate stores under the Whole Foods Market brand, and Mackey will
remain CEO, the companies said.
Whole Foods has posted
seven straight quarterly sales declines at established stores and recently
overhauled its board of directors in the face of pressure from activist hedge
fund Jana Partners LLC.
Jana, which disclosed
an 8.3 percent stake in Whole Foods in April and is the company's second
biggest shareholder, stands to make roughly $300 million from the sale to
Amazon.
The deal is for $13.4
billion in cash and the remainder in debt. The acquisition price implies a
trailing 12-month price-to-earnings multiple for Whole Foods of 31 times,
versus a 14.4 average for the S&P 500 Food Retail index.
Amazon and Whole Foods
expect to close the deal during the second half of 2017.
EYES ON GROCERY
SHOPPERS
Amazon, started in
Seattle in 1994 by Bezos, a former hedge fund manager, has grown into the
world's biggest diversified online retailer, with a market capitalization of
nearly $500 billion. It has expanded from a book seller into a merchant of
nearly all consumer products, as well as producing videos.
Both Amazon and Whole
Foods cater to younger consumers including millennials as well as the affluent.
"Amazon could
bring technology to all Whole Foods locations, or it could absorb Whole Foods
into AmazonFresh. Either way, it's good for consumers like myself," said
Di Wu, a New York resident in her early 30s who is a member of Amazon's Prime
fast-shipping club and who shops at Whole Foods at least twice a week.
"Amazon is known
to drive down prices and make the shopping experience more efficient," Wu
said.
Goldman Sachs Group
Inc advised Amazon on the deal and provided bridge financing. Bank of America
Corp also provided financing to Amazon, while Evercore Partners Inc advised
Whole Foods.
Portfolio Metrics
Detailed Metrics
Closed Long Positions
Closed Short Positions
Joseph S. Kalinowski, CFA
Email: joe@squaredconcept.net
Twitter: @jskalinowski
Facebook: https://www.facebook.com/JoeKalinowskiCFA/
Blog: http://squaredconcept.blogspot.com/
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