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

By Laura Stevens and Annie Gasparro Features Dow Jones Newswires

Amazon.com Inc. said on Friday it would buy Whole Foods Market Inc. for $13.7 billion, including debt, instantly transforming the online giant into a major player in the bricks-and-mortar retail sector it has spent years upending.

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The acquisition, Amazon's largest by far, gives it a network of more than 460 stores that could serve as beachheads for in-store pickup and its distribution network. It makes Amazon an overnight heavyweight in the all-important grocery business, a major spending segment in which it has struggled to gain a foothold because consumers still largely prefer to shop for food in stores.

In its drive to conquer consumer spending, Amazon has ventured far from its roots as an online book seller. It is developing its own delivery network, and has become a significant video content creator and cloud data service provider.

Its Whole Foods deal is a blow to other retailers, notably Wal-Mart Stores Inc., which derives more than half of its sales from groceries and is struggling to compete online. Traditional grocers such as Kroger Co. and Albertsons Cos. have been battling volatile food prices, lackluster consumer spending and stiffer competition from deep discounters, online merchants and a plethora of other places to purchase food.

Retail stocks including Wal-Mart, Target Corp. and Costco Wholesale Corp. sank. Amazon shares up more than 3% at $996.93 in recent trading, close to its record high.

"Amazon views grocery as one of the most important long-term drivers of growth in its retail segment," writes Colin Sebastian, a Robert W. Baird analyst. The acquisition gives Amazon a scale and density "that otherwise would have taken years to build out."

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The deal came together in the past month, just after Whole Foods announced an overhaul of its board of directors, according to people familiar with the deal. The process was influenced by Amazon's own plans to build out a network that would have competed against Whole Foods, the people added.

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

Acquiring Whole Foods is a strategic move for Amazon to quickly grab a bigger portion of the estimated $674 billion U.S. market for edible groceries, according to consulting firm Kantar Retail. Until now, Amazon has largely focused its grocery efforts around its Amazon Fresh subscription service, which promises quick food delivery for online orders.

But online grocery shopping is logistically complex, often requiring fast delivery for cold items as part of large orders on less-profitable routes, where stops are spread far apart. And many consumers still prefer to touch, smell and pick out fresh items like fruits and vegetables for themselves.

Online shopping accounted for 2% of grocery sales last year, according to Kantar. Before Amazon's announcement, that share was projected to grow to 3% by 2021. Amazon's food-and-beverage grocery market share was estimated at 1.1% last year, compared with 1.7% for Whole Foods, according to Cowen.

Now it's up to Amazon to combine two distinct corporate cultures and leverage its full-scale entry into bricks-and-mortar retailing. While Amazon has largely remained a hands-off manager of its smaller acquisitions like Zappos.com, it is likely to take a more active role in Whole Foods, according to Macquarie analyst Ben Schachter.

John Mackey will remain chief executive of Whole Foods and the stores will continue to operate under that brand and maintain their suppliers, Amazon said in its release. Jeff Bezos, Amazon's chief executive, said the company is "doing an amazing job and we want that to continue."

Still, Whole Foods has been under fire, struggling as traditional grocers expand the natural and organic offerings that have been Whole Foods' mainstay. Its share price has lost nearly half its value since its 2013 peak, as sales at stores open at least a year have slumped.

Activist hedge fund Jana Partners LLC, the company's second-largest shareholder with a roughly 8.2% stake, and mutual-fund giant Neuberger Berman, which owns 2.7% of the stock, have been pressing Whole Foods to add directors with experience in retail operations, technology, finance and real estate, and to consider a sale.

Still, Citi analysts note that Whole Foods' operating margins, at 5.5%, are higher than Amazon's North American retail business, at 3%.

At first glance, the two retailers don't seem to be an immediate match. Amazon is known as a low-price leader, while Whole Foods is a premium offering. But Whole Foods' network of stores in 42 states could act as potential hubs for grocery delivery and package pickups, playing into Amazon's ambition to handle more of its own logistics and deliveries.

Combining the two companies' market shares in food-and-beverage and consumables would make it the fifth-largest U.S. grocery retailer, according to an analysis by Cowen, behind Wal-Mart, Kroger, Costco and Albertsons/Safeway.

Analysts said they expect Amazon to use its Whole Foods acquisition to promote private-label products, integrate with and grow its artificial-intelligence-powered Echo speakers, boost Prime membership and entice more customers into the fold.

David Benoit and Austen Hufford contributed to this article

Write to Laura Stevens at laura.stevens@wsj.com and Annie Gasparro at annie.gasparro@wsj.com

(END) Dow Jones Newswires

June 16, 2017 15:37 ET (19:37 GMT)