Will Grocery Rivals Try to Disrupt the Amazon-Whole Foods Merger?

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Amazon (NASDAQ: AMZN) could upend the U.S. supermarket sector with its Whole Foods Market (NASDAQ: WFM) buyout, slashing prices to undercut rivals. As a result, supermarket stocks like Kroger (NYSE: KR) were hobbled by news of the deal. But they may not let this deal go through so easily.

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In this segment from Industry Focus: Consumer Goods, the team considers the likelihood of Kroger or another major competitor making a rival bid for Whole Foods. Amazon boasts a big cash stockpile, low cost of debt, and high stock price that will make it hard for any other company to outbid it.

A full transcript follows the video.

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This video was recorded on June 20, 2017.

Vincent Shen: We've put a little bit of a caveat on some of our statements about whether this deal closes, if the deal ultimately happens. That comes about because, for the past couple trading days, Whole Foods stock has actually topped the $42 per share offer price. As of a few minutes before the show when we got in the studio, it was trading around $43 per share. I think this is coming from some reports, also some speculation now of potential rival bids coming from competing grocery players like Kroger or Wal-Mart. The idea here is, for a Kroger, for example, taking over Whole Foods, it's going to be a very good strategic fit. They're in the same business, just some of the cost savings that you can expect from bringing their supply chains together, and things along those lines, probably hundreds of millions of dollars in savings, and also part of that is strategic in that you prevent Amazon from having hundreds of stores across the country to disrupt the industry with. That could be incentive enough, this competing play. How much potential do you think there is for a bidding war to happen, and that $42 per share that Amazon currently has on offer potentially going up?

Adam Levine-Weinberg: Yeah, I think it's possible, and I think that Kroger is the company more than any other that seems like a possible candidate to try to make a rival offer. Kroger is just humongous. They have more than $100 billion in annual sales. So they're not much smaller than Amazon, in fact, in terms of sales. The main difference is that while both companies have pretty low profit margins, Amazon is growing, and there's huge long-term opportunities for margin expansion. Kroger understands the grocery business is always going to be low margin. Kroger's stock has just been crushed in the past week. They released a bad earnings report just the day before this Amazon-Whole Foods announcement came out. Then, with the Amazon Whole Foods deal news, Kroger stock ended up down about 30% in the span of two days.

Shen: You got a double whammy.

Levine-Weinberg: Right. So, that shows what investors see the threat being. If the threat is really that large, that raises the question, maybe Kroger should be willing to make a deal here. One of the problems is obviously, the purchase price is already pretty high, and now Kroger stock is trading at such a discounted valuation that unless you can raise enough debt to do a completely cash deal, you're going to be selling stock at a discounted price to make a deal happen, which is potentially risky, or even if it's not as risky for the company as letting Whole Foods go to Amazon, it's something that the shareholders for Whole Foods might not want. They might prefer the certainty of an all-cash deal, as opposed to a partial or complete stock deal where you don't know what you're getting because you don't know whether Kroger stock is going to go up or down. I think Amazon would probably raise its bid if it had to because of the value of getting that Whole Foods into its ecosystem. It certainly can afford to pay more, whereas I don't know what Kroger's capacity would really be to pay a hefty multiple. But I could definitely see them getting into the bidding war, because adding Whole Foods would allow a lot of cost savings, because you would get that purchasing power that Kroger already has. That said, the main benefit would actually be to prevent new competition from Amazon. The risk, of course, is that if Whole Foods isn't available, that Amazon will go it alone or buy somebody else, and you will only have delayed Amazon's growth into the grocery category by a year or something like that.

John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool’s board of directors. Adam Levine-Weinberg has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Whole Foods Market. The Motley Fool has a disclosure policy.