Amazon to Buy Whole Foods for $13.7 Billion -- 6th Update

By Austen Hufford, Annie Gasparro and Laura Stevens Features Dow Jones Newswires

Amazon.com Inc. said it would buy Whole Foods Market Inc. for $13.7 billion as the giant internet retailer extends its reach and makes a deeper push into the grocery space.

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Amazon will pay $42 a share for Whole Foods, valuing the grocer at a 27% premium to its closing price Thursday. The deal is by far the largest in Amazon's history, and it is expected to close in the second half of this year.

The deal will give Amazon a network of roughly 450 Whole Foods locations spread out across 42 states and could allow Amazon to reach customers closer to their homes. The retailer has worked for years to build its Fresh grocery delivery business, but its share of the market is just a sliver.

The Seattle-based company recently tested brick-and-mortar grocery concepts, including two AmazonFresh Pick Up locations in its hometown, as it works to grab a bigger piece of the more than $600 billion edible-food consumer spending category.

Still, at first glance, the two don't seem to be a match. Amazon is known as a low-price leader, while Whole Foods is more of a premium offering. The company culture, strong brand loyalty, and its network of grocery stores was likely a draw.

While grocery accounts for a large component of consumer sales overall, online retailers have largely been unable to fully crack the code. They face hurdles like consumers wanting to pick their own produce and the need to deliver perishable, fresh and frozen food to people's homes.

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Amazon's move tanked the stocks of grocery competitors as investors worried that Amazon could do to grocery the same as it did to booksellers. Kroger Co. shares fell 12%, Target Corp. shares fell 8.7%, Supervalu Inc. shares fell 15%, Costco Wholesale Corp. shares fell 6.4% and Wal-Mart Stores Inc. shares dropped 5.6%.

Amazon's newfound foothold in brick-and-mortar grocery comes at a time when the grocery industry is already reeling from competition, with discounters like Aldi expanding in the U.S. and more customers shopping for groceries online.

Amazon has been inching into Kroger Co. and Wal-Mart Stores Inc.'s territory in recent years. Americans' shopping trips online have risen 6.8% over the past year, compared with a 0.5% increase in overall grocery trips, according to Nielsen.

Online grocery shopping accounted for 2% of sales in the sector last year, according to Kantar Retail. Before the Amazon deal announcement, the share was projected to grow to 3% by 2021.

Amazon's low prices have partly forced rival grocers to sharpen their deals in return. Kroger on Thursday said traditional grocers are competing for the $1.5 trillion Americans spend on food -- whether that is a fast-food restaurant, convenience store or online. "We have to redefine the market as share of stomach," Kroger Chief Rodney McMullen told investors Thursday. Kroger, which lowered its earnings forecast for the year, set off a wave of declines in grocery stocks, with its shares falling 19%.

David Ciancio, a senior customer strategist for Dunnhumby and former Kroger executive, said "this is the most difficult time I've seen for the industry, and I've been in it 47 years."

Whole Foods has also faced some unique struggles as traditional grocers expand their natural and organic offerings that have been the mainstay of the company.

Activist hedge fund Jana Partners LLC, the company's second-largest shareholder with a roughly 7% stake, and mutual-fund giant Neuberger Berman, which owns 2.7% of the stock have been pressing Whole Foods to consider a sale and add directors with experience in retail operations, technology, finance and real estate.

Shares of Amazon rose 3.1% to $994.07 in midday trading, while Whole Foods shares ramped up 27% to $42, meeting the deal price.

The deal came together in the past month, just after Whole Foods announced a dramatic overhaul to its board of directors, people familiar with the deal said. The board changes included five new directors, who arrived to promptly discover Amazon had reached out to talk about a deal, people familiar with the matter said.

The process was influenced by Amazon's own plans to build out a network that would have competed against Whole Foods, and given the technology company skipped typical Wall Street banker advice, Whole Foods was wary it would walk away at any moment, the people said.

John Mackey will remain as chief executive of Whole Foods and the store will continue to operate under its brand and maintain its suppliers.

Whole Foods' stock has lost nearly half of its value since peaking in 2013, as its same-store-sales have persistently fallen since September 2015.

David Benoit contributed to this article

Write to Austen Hufford at austen.hufford@wsj.com, Annie Gasparro at annie.gasparro@wsj.com and Laura Stevens at laura.stevens@wsj.com

(END) Dow Jones Newswires

June 16, 2017 11:50 ET (15:50 GMT)