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Questions Linger After Whole Foods-Wild Oats Deal

Questions Linger After Whole Foods-Wild Oats Deal

The bizarre seven-month saga of Whole Foods' effort to acquire Wild Oats took a giant step toward closure last week after a federal court thwarted last-ditch efforts by the Federal Trade Commission to block the deal on antitrust grounds. Whole Foods said it had acquired most of the stock of its smaller, publicly traded rival in a tender offer of $18.50 per share and had secured a five-year,

AUSTIN, Texas — The bizarre seven-month saga of Whole Foods' effort to acquire Wild Oats took a giant step toward closure last week after a federal court thwarted last-ditch efforts by the Federal Trade Commission to block the deal on antitrust grounds.

Whole Foods said it had acquired most of the stock of its smaller, publicly traded rival in a tender offer of $18.50 per share and had secured a five-year, $700 million loan to fund the purchase.

Several question marks still hang over the deal, however, including the actual number of Wild Oats' 109 locations that Whole Foods plans to close. In a prepared release last week, Whole Foods said it expected to complete the sale of Wild Oats' 35 Henry's and Sun Harvest locations in California and Texas, along with a warehouse in Riverside, Calif., to Los Angeles-based Smart & Final by the end of this month. It also said it would close an undetermined number of additional Wild Oats locations.

“Wild Oats has been rationalizing its store base over the last several years to shed underperforming stores, but some additional store closures are expected as well as the relocation of some stores that overlap with stores Whole Foods Market currently has in development,” Whole Foods said in a prepared statement.

Court filings released during the antitrust case revealed that 30 additional locations were slated for closure.

Whole Foods plans to remodel the remaining stores and convert them to its own banner, the company said, a process that could take up to two years.

There will be a few exceptions, however. In a separate announcement last week, Whole Foods said it planned to convert one Wild Oats store in Boulder, Colo., where Wild Oats is based, to a new format called “Whole Foods Market Express” that will focus on grab-and-go convenience foods. The 18,500-square-foot location serves a high concentration of University of Colorado students nearby, the company said.

Another Boulder Wild Oats location will be converted back to the Alfalfa's Market banner, which Whole Foods said was in tribute to “one of the early pioneers of natural grocery.” Yet another Boulder store will retain the Ideal Foods banner.

“The great thing about the Whole Foods operating strategy is that they don't have a one-size-fits-all mentality,” said Chuck Cerankosky, an analyst at FTN Midwest Research, Cleveland. “A store in Cleveland will look very different from one in Fairfax, Va.”

He said it would probably take “more than a couple of weeks” to evaluate the acquired locations and determine a course of action for the legacy stores, which are scattered throughout the country.

“Probably the most important aspect will be to give Wild Oats a merchandising flavor that had never been fully developed as part of the repositioning of the company that had occurred over the last several years,” Cerankosky said. “While the company was near bankruptcy at the time [former Chief Executive Officer] Perry Odak and his team came in [in 2001], it progressed greatly, but the merchandising is the last big step to be completed. Now that's going to be done by Whole Foods.

“The great advantage Whole Foods has is that it has a very well-proven merchandising strategy that it can put into Wild Oats, with the appropriate modifications, given that the store sizes are smaller and not all the locations are optimal. But given time, they will make it work.”

Another question that hangs over the company is the fate of John Mackey, Whole Foods' founder, chairman and CEO, who is being investigated by his own board of directors and by the Securities and Exchange Commission for anonymous posts he made on an Internet stock message board over a period of several years, praising Whole Foods and deriding Wild Oats.

Although some analysts had previously told SN they expected Mackey's days at the company to be numbered, Cerankosky said he thinks the Whole Foods CEO will be able to retain his position.

“I think John Mackey is an extremely important part of the Whole Foods success story,” he said. “I think his experience with the chatroom was a minor consequence — more embarrassing than material — and I think he will be an integral part of making Wild Oats an integral part of Whole Foods.”

Jose Tamez, managing partner at executive-search firm Austin-Michael, San Antonio, also said he expects Mackey to remain at the helm of the combined companies.

“I understand that John Mackey is so emotionally tied to everything that goes on there, that it doesn't surprise me that he got on there and did all that blogging,” Tamez told SN. “In fairness, he's probably not the first.

“Had the deal not gone through, it's difficult to say what might have happened, but given his role in that company's growth over the last 10 years, it's hard to believe he would have been ousted,” he added. “He probably will get a slap on the wrist, either formal or informal — he's not going anywhere.”

Gregory Mays, who had been Wild Oats' chairman and acting CEO since last year, left the company last week the day after the tender offer for Wild Oats' shares was completed, Wild Oats spokeswoman Sonja Tuitele told SN.

“Whole Foods is now responsible for running Wild Oats,” she said.

The sale allowed Los Angeles-based Yucaipa Cos., which was Wild Oats' largest investor, to cash out its investment. It originally acquired a 9.2% stake in Wild Oats for $25 million in 2005, and increased its stake to more than 15% last year, when shares were trading at about $12.50. It also owns a stake in Pathmark Stores, which is being acquired by Montvale, N.J.-based A&P.

Whole Foods and Wild Oats had announced their intentions to merge in February, but ended up battling the FTC in court as the agency sought to block the deal on antitrust grounds. The FTC argued that Whole Foods and Wild Oats occupy a distinct food retailing niche it called “premium natural and organic” supermarkets and that eliminating Wild Oats as a competitor would allow Whole Foods to raise prices.

The courts sided with the chains, noting the increasing competitive pressures in the natural and organic arena from traditional supermarket operators.

“While closing this merger has taken longer than we anticipated, we are very excited to now begin the integration process,” Mackey said in a prepared release last week. “We have always benefited from learning from our past acquisitions and believe this merger will result in a company that is much stronger and better positioned for the future.”

The total purchase was valued at about $722 million, based on Wild Oats' market cap of $553 million at closing and its total debt of $169.54 million.

A Wild Ride

Some key events in Whole Foods' effort to acquire Wild Oats:

  • Feb. 21, 2007: Whole Foods Market announces that it has reached an agreement to acquire Wild Oats Markets for $18.50 per share, a premium of 17.5%, valuing the total transaction, including debt, at about $700 million.

  • May 9, 2007: John Mackey, chairman and chief executive officer, Whole Foods, says in an earnings conference call that some officials at the Federal Trade Commission have “voiced concerns” over the deal.

  • June 5, 2007: The FTC says it will seek to block the transaction on antitrust grounds. Both Whole Foods and Wild Oats say they will fight to consummate their planned merger. Details supporting the FTC's case are revealed over the following weeks, including an email Mackey sent to Whole Foods' board noting that buying Wild Oats would “eliminate nasty price wars” in some markets.

  • June 19, 2007: Mackey posts a 15,000-word blog entry on Whole Foods' website titled “Whole Foods Market, Wild Oats and the Federal Trade Commission,” in which he complains about the way the FTC has handled its antitrust investigation into the deal.

  • June 20, 2007: Whole Foods says it plans to sell its Henry's and Sun Harvest banners in California and Texas to Smart & Final after the plan was disclosed in filings related to the antitrust case.

  • July 17, 2007: The Securities and Exchange Commission says it is investigating comments made by Mackey on the Yahoo! stock message board in which Mackey, using the pseudonym “Rahodeb,” had praised Whole Foods and bashed Wild Oats over a period of nearly seven years. Mackey issues an apology. Whole Foods' board of directors also launches an investigation.

  • July 31-Aug. 1, 2007: At the antitrust hearing in U.S. District Court in Washington, the FTC argues that Whole Foods and Wild Oats operate in a distinct class of trade called “premium natural and organic” supermarkets, and that eliminating Wild Oats would allow Whole Foods to raise prices. The two chains argue that they compete with a much broader range of food retailers and that their pricing is not determined by each other's presence in the market alone.

  • Aug. 3, 2007: Some news organizations obtain documents filed on the FTC's website in which information that was supposed to be held confidential was disclosed. The information included estimates that Whole Foods would shutter 30 Wild Oats locations in addition to the 35 Henry's and Sun Harvest stores it planned to sell. Whole Foods issues a statement saying it has not yet determined how many stores it will close and says it is investigating the FTC's release of the information.

  • Aug. 16, 2007: U.S. District Judge Paul Friedman rules that the two chains can indeed go through with their merger, denying the FTC's request for a temporary restraining order against the deal. The FTC files for a stay pending appeal.

  • Aug. 23, 2007: The FTC's request for a stay pending an appeal is denied by another court, allowing Whole Foods to proceed with the acquisition of Wild Oats' stock.

  • Aug. 27, 2007: Whole Foods completes its tender offer for Wild Oats' shares.
    — M.H.