Deal or No Deal, Wild Oats Still a Potential Target

BOULDER, Colo. If Whole Foods doesn't buy Wild Oats, it might be an attractive target for someone else, analysts told SN last week. Wild Oats Markets, based here, has an agreement to be acquired by Austin, Texas-based Whole Foods Market, but the Federal Trade Commission has sued to block the deal. The two natural/organic chains are challenging the FTC's action in a federal court hearing scheduled

BOULDER, Colo. — If Whole Foods doesn't buy Wild Oats, it might be an attractive target for someone else, analysts told SN last week.

Wild Oats Markets, based here, has an agreement to be acquired by Austin, Texas-based Whole Foods Market, but the Federal Trade Commission has sued to block the deal. The two natural/organic chains are challenging the FTC's action in a federal court hearing scheduled for July 31.

If the FTC prevails, that would leave Wild Oats on the table as a bite-sized meal either for another supermarket chain to gobble up or for private investors.

Apollo Management Group, which has already agreed to buy the 35 Henry's and Sun Harvest stores that Wild Oats owns, could still follow through with that transaction regardless of whether Whole Foods and Wild Oats consummate their merger, analysts said. The New York-based investment firm, which earlier this year acquired the Smart & Final chain, could also seek to acquire the 70 or so Wild Oats locations that would remain after its purchase of Henry's and Sun Harvest.

“At this point, Wild Oats has a share base that is probably 100% committed to a quick deal,” said Andrew Wolf, an analyst at BB&T Capital Markets, Richmond, Va.

Wild Oats could also choose to follow through on the sale of the Henry's and Sun Harvest stores, which operate in California and Texas, respectively, and then use the proceeds to improve the remaining store base and continue operating as a stand-alone entity, he suggested. He projected revenues of $130 million-$150 million from the sale of the 35 Henry's and Sun Harvest locations.

Perry Caicco, an analyst with CIBC World Markets, Toronto, suggested that Whole Foods could also become an acquisition target if it is blocked from buying Wild Oats, especially if its share price falls even further after the court's decision on the FTC's filing.

“Ironically, if [Whole Foods] shares were to meaningfully decline, we believe the company could itself become a target for a larger grocery chain,” he wrote in a report. “If this were the case, we would name Safeway as the most likely acquirer, given its focus on the natural and organic space, strengthening balance sheet and compelling equity valuation.”

Chuck Cerankosky, an analyst with FTN Midwest Research, Cleveland, disagreed, however.

“I would think the Wild Oats side of the equation would be more likely to find a potential buyer rather than the Whole Foods side,” he said, adding that the lack of a permanent chief executive officer and chief financial officer at Wild Oats also makes an acquisition of that company more likely. “On the other hand, with the exception of the last few quarters, Whole Foods has been showing a strong sales and earnings growth trend, and I think they would prefer to stay independent.”

Wolf of BB&T Capital Markets also said it was more likely that Whole Foods would remain an independent, publicly traded company if the court grants the FTC's request for a preliminary injunction to block the acquisition of Wild Oats.

“Probably Wild Oats ends up sold to somebody, either whole or in pieces, and I don't think Whole Foods gets sold,” he said.

He also pointed out that Wild Oats had long been thought of as an acquisition target before Whole Foods announced its deal in February. In an email message to the Whole Foods board of directors, John Mackey, chairman and CEO, Whole Foods, argued that one of the reasons it was seeking to buy Wild Oats was to prevent another large supermarket chain from buying it and turning it into a more viable competitor.

The fact that Yucaipa Cos., Los Angeles, has an 18% stake in Wild Oats also strengthens the argument for a sale of the company, as the investment firm will eventually seek a return, analysts said.

One analyst, who asked not to be identified, argued that the FTC's decision to lump Whole Foods and Wild Oats together in a separate class of trade from traditional supermarkets opens the door for one of those traditional operators to acquire either of the natural/organic specialists without FTC interference.

“That logic makes sense, but I think both Safeway and Kroger are happy with their own store formats and their ability to get into the organic and natural segment through their own offerings,” said Cerankosky.

One of the factors that could determine whether an acquisition takes place is whether or not the stock prices of either Whole Foods or Wild Oats drop significantly in the event that the FTC succeeds in blocking the deal. Whole Foods' shares have slid about 15% since Mackey first revealed that the FTC was concerned about the deal, and Wild Oats' shares have lost about 5% in that time, but some analysts said the shares could fall even further.

“You could have substantially cheaper acquisitions,” said the analyst who had asked not to be identified. “They are viable assets, they have created a good niche, and there is lots of learning there for a conventional chain.”