If a new legal ruling forces Whole Foods to reverse its Wild Oats buy-out, WFMI shares could soar.
A federal appeals court has decided that the FTC's challenge of the merger between Whole Foods (NASDAQ: WFMI) and Wild Oats should have gone forward. A lower court has said the FTC had to cease its investigation into whether the marriage was anti-competitive.
According toThe Wall Street Journal, "Jeffrey Schmidt, head of the FTC's competition bureau, said the agency is hopeful the ruling will ultimately allow the FTC to undertake a full review of competitive issues raised by the combined companies."
Whole Foods ended up with 74 Wild Oats stores, which it plans to cut down to 50. The FTC could ask the new company to close other locations in areas where the new parent has two stores, and, perhaps a monopoly for that region.
The FTC could also argue that the entire merger constitutes an antitrust threat. That news could not be better for WFMI shareholders. If Wild Oat has to be spun back out, it would need to re-brand its stores, add expensive management, and undertake its own marketing. In other words, it would be a severely weakened competitor for Whole Foods, instead of a thorn in the side of WFMI shareholders.
Shares in WFMI are off well over 40% this year. Stocks in many other major food retailers are closer to flat. Part of this may be due to the concern that premium products do poorly in a recession. But it may also have to do with the fact that Wild Oats stores were considered weaker as a group than the original Whole Foods chain.
If WFMI gets to rid itself of the company it got in the buy-out, its shares might get back from $22, near their 52-week low, to the $30 to $40 range.
Although Whole Foods Market's (NASDAQ: WFMI) acquisition of Wild Oats has already been completed, the FTC is still trying to get in the way. The Commission is asking a Washington appellate court to overturn a federal district court's ruling [subscription required] that allowed the merger to proceed.
According to The Wall Street Journal, the FTC was split on whether to pursue the appeal, and it's considered a Hail Mary pass.
Regardless of whether you support or oppose the district court's ruling that allowed the deal to proceed -- and in spite of Mr. Mackey's crazy message board antics -- you have to wonder what the point of this appeal is. Are taxpayers really having their money spent wisely pursuing an appeal that has no chance?
I don't think so. Consumers would be better served if the FTC devoted some of this energy to cracking down on the numerous fraudulent multi-level marketing companies that continue to recruit distributors, uninhibited by anti-pyramid laws.
MOST NOTEWORTHY: Amazon.com (AMZN), Luminent Mortgage (LUM), Whole Foods (WFMI), Tenet Healthcare (THC) and Pediatrix Medical (PDX) were today's noteworthy upgrades:
Bernstein upgraded Amazon.com (NASDAQ: AMZN) to Outperform from Market Perform, citing margins on 3rd party transactions that are close to eBay's (EBAY) and that the overseas merchants initiative will increase 3rd party units to 25% of sales. The move is expected to increase operating margins to 6.2% by 2011, above the previously expected improvement of 4.6% by the same time.
JMP Securities said Luminent Mortgage's (NYSE: LUM) $64.9M emergency financing from Arco Capital may preserve some value for shareholders, and upgraded shares to Market Underperform from Sell.
JP Morgan added Whole Foods (NASDAQ: WFMI) to its Focus List, and expects the Wild Oats (NASDAQ: OATS) acquisition to be a catalyst for shares.
Things looked pretty rough for the Whole Foods Market (NASDAQ: WFMI) bid to merge with smaller rival Wild Oats (NASDAQ: OATS). In late July, the Whole Foods CEO got himself in trouble over online message board comments and that pushed the stock to a 52-week low of $36. Then the FTC tried to block the merger on the grounds that putting the two companies together would create an operation that would raise prices on organic food.
Since late July, however, Whole Food shares are up 25% while Wild Oats trades just below its 52-week high, at $18.46. In August, short sellers cut their position in Whole Foods by 9.3 million shares to 15.1 million. It was the largest single drop in shares sold short for any company traded on the Nasdaq.
The FTC went so far as to take the fate of the merger to federal court, but both a District and Appeals Court failed to halt the merger. The first case was filed in June and, according toMarketWatch, asked the judge "for a preliminary injunction blocking the deal, pending a full review."
A successful merger is likely to have quick benefits for Whole Foods. Last quarter the smaller Wild Oats made only $1.9 million on almost $312 million of revenue. The organic food retailers costs need to come down.
Cutting those costs is likely to be the first thing that Whole Foods does.
Wal-Mart (NYSE: WMT) has been buying retail chains and entering joint ventures all over the world to improve its international exposure. Now, with same-store sale in the U.S. in trouble, it is setting up a unit to look at acquisitions in the U.S. as well.
According to the Financial Times [subscription], with UK retailer Tesco moving into the U.S. with its "Fresh & Easy" small format neighborhood groceries, Wal-Mart may think that it cannot afford to ignore the success of niche stores.
Wal-Mart could certainly use something to jump start sales in its home market, and groceries may be a good place to start.
There are several retailer operators that could end up on Wal-Mart's radar. One is likely to be Whole Foods (NASDAQ: WFMI), which is about to merge with competing organic food chain Wild Oats (NASDAQ: OATS). At the larger end of the market are operators like Kroger (NYSE: KR), which has a market cap of over $19 billion but has about 3,500 stores and annual sales of over $66 billion. Wal-Mart's market cap is $179 billion.
Wal-Mart needs a lot of help in the U.S. -- it may just buy itself a turnaround.
The FTC's bid to block Whole Foods' (NASDAQ: WFMI) acquisition of Wild Oats (NASDAQ: OATS) has ended in failure. A three-judge panel of D.C.'s U.S. Court of Appeals rejected the government's appeal to have the merger blocked. The judges ruled that the FTC had failed to show that Judge Paul Friedman, who denied the government's motion a week ago today, had acted improperly. Last Thursday, the
Whole Foods says it will close the deal as soon as possible. CEO John Mackey likely remains on the hot-seat, and his anonymous message board ramblings are still the subject of an SEC investigation.
Now that the merger is done, investors can begin to discuss how the merger will impact Whole Foods as a stock. The FTC's effort to block it indicates that it should be very good indeed.
Antitrust is always tough to predict. The laws are sketchy -- and markets can change quickly. Besides, politics can play a big role.
That's why the Federal Trade Commission (FTC)'s antitrust lawsuit -- on the Whole Foods Market (NASDAQ: WFMI) and Wild Oats Markets (NASDAQ: OATS) linkup -- is so interesting.
The FTC believes that the transaction will reduce competition and, as a result, be harmful to consumers.
However, federal Judge Paul Friedman doesn't think so. In fact, yesterday we got his 93-page opinion on the matter (according to a report in Reuters).
Reuters has written that the progress in the Whole Foods (NASDAQ: WFMI) merger with Wild Oats (NASDAQ: OATS) may be a sign that other mergers being scrutinized by the US government may have an easier time of getting approval. Not likely.
The FTC has tried to block the Whole Foods deal because it may raised the amount that consumers have to pay for organic food. Of course, other food retailers offer these products, so the government's position was probably always a bit thin. The agency went to federal court to try to block the marriage, but was unsuccessful.
Now Reuters is floating the theory that the apparent success of the grocery store merger may make it easier for Sirius (NASDAQ: SIRI) to merge with rival satellite company XM (NASDAQ: XMSR).
The concept is full of holes. Sirius and XM are a de facto duopoly and, merged, would be a monopoly. Their ability to send satellite signals with radio content to receivers is not a business that any other company can enter. That is not really a bit like the Whole Foods situation.
The SIRI/XMSR merger is also a deal that faces opposition in Congress. Legislators want to know why they should countenance a business combination that not only lacks any competing technology but is also one that may use its position to raise rates over time.
The news about the Whole Foods merger may be good for it, but the deal has nothing to do with satellite radio.
In spite of John Mackey's most self-destructive efforts at getting the merger he wanted so badly blocked,. it appears that it will go through. Although the FTC says it will appeal, Whole Foods Market (NASDAQ: WFMI) appears poised to acquire rival Wild Oats (NASDAQ: OATS). Shares of Whole Foods are up 6.3% on the news after-hours. Wild Oats, the buyout target, is seeing its stock soar almost 20%.
According to the Associated Press,U.S. District Judge Paul L. Friedman's filed a 93-page document (sealed because if contains trade secrets) denying the FTC's plea to block the deal. The FTC argued that the merger would lead to higher prices for consumers, and appeared to have compelling evidence based on internal documents from the company. The deal was referred to as "Operation Goldmine" at Whole Foods, and the company planned to shutter more than 25% of Wild Oats stores. Emails from Mackey to the company's directors referred to the acquisition as a way to "eliminate a threat" and avoid "price wars".
Mackey has got to be thrilled that the deal is going through. Aside from the obvious strategic benefits to his company, the failure of the deal would likely have been pinned on him. He would have become known as "Motor Mouth Mackey": The man who helped the FTC block an important acquisition because he couldn't shut his trap.
Given Whole Foods Market (NASDAQ: WFMI) CEO John Mackey's penchant for posting too much information on his blog/anonymous message boards, it might seem ironic that the company is considering suing the FTC for inadvertently posting the company's trade secrets on the internet.
On Tuesday, the FTC failed to completely redact Whole Foods' trade secrets from a court filing that was posted on an online database. Reporters caught the glitch, and information was leaked.
Some of the information that should have been redacted included an assertion that Whole Foods prevents its suppliers from selling directly to Wal-Mart (NYSE: WMT) in an effort to raise the retailer's costs.
Both Whole Foods and Wild Oats (NASDAQ: OATS) have an option to terminate the merger agreement if it does not gain regulatory approval by the end of the month.
Shares of Wild Oats continue to languish more than 20% below the agreed upon price, indicating investor skepticism about the deal's prospects.
One expert argued that the two chains compete in a much broader market -- grocery stores -- with much bigger chains like Safeway and Kroger also in the space. But another expert discussed research suggesting that markets containing a Whole Foods and a Wild Oats store tend to have lower prices, which would suggest that they are in fact competing.
The U.S. District court is expected to issue a decision on the FTC's preliminary injunction seeking to block the merger some time in the next few weeks.
Given that this doesn't appear to be a black and white issue, as evidenced by disagreement among the experts, CEO John Mackey's "macho posturing" emails could end up looming large, as they seem to suggest that the merger is motivated by a desire to eliminate competition. Not only has he embarrassed himself and run into trouble with the SEC for his message board post, but he may also have harmed his company's growth prospects with his overactive typing fingers.
Today was a big day for Whole Foods Markets Inc. (NASDAQ: WFMI) as it had its court date regarding the merger with Wild Oats Markets Inc. (NASDAQ: OATS) and reported quarterly earnings after the close. As of 5:47 p.m., WFMI stock is up 10.1% in after-hours trading.
Chronologically then:
The question before the court today was whether these two companies constitute a unique market, as clearly they both compete with several other companies that sell organic foods, some as large as the world's biggest retailer, Wal-Mart Stores Inc. (NYSE: WMT). However, if Wild Oats acts as a constraint on Whole Foods, then a combined company would have greater pricing power. Key to the FTC case (which filed the suit against the $565 million merger) is an e-mail sent by Whole Foods CEO in which he says the deal would enable the company to "avoid nasty price wars." Mackey was also found leaving messages on Yahoo! message boards.
After the close this afternoon, Whole Foods also reported third-quarter earnings. While profit slipped 8.9% in the most recent to 35 cents per share, it beat analysts estimates of 33 cents per share. Sales were 13% higher during the quarter reaching $1.51 billion, a little short of the $1.54 billion estimated by analysts. The organic grocer was hit by costs on new stores. Whole Foods spent $15 million on preopening and relocation costs.
Key metric same-store sales rose 7% -- impressive, but less than the 9.9% jump a year ago. CEO John Mackey noted that comparable sales so far in the fourth-quarter have stabilized, as indicated from July 7.6% same-store sales growth. Next year, Mackey said he expects to open even more stores. As for the merger, he was hopeful it would be approved.
By 6:12 p.m., WFMI shares are up 8.3% in after-hours trading to $40.10.
Verizon Communications Inc (NYSE: VZ) to report Q2 earnings; conference call at 8:30am. Analysts will look at Verizon's marketing strategy [particularly for FiOS], infrastructure improvements, and operating expenses. Above-average debt remains a blemish, but Wall Street will overlook that if Verizon registers impressive subscription and market share statistics, and demonstrates that its fiber optic-based FiOS Internet/TV network roll-out timetable for major markets remains on schedule.
Monster Worldwide Inc (NASDAQ: MNST) to report Q2 earnings; conference call at 10am. Monster is expected to register adequate, albeit decelerating revenue growth in Q2 compared to Q1, hence the grade for the company's performance may hinge on analysts' projection regarding the likely revenue scenario moving forward.
Tuesday July 31
Federal District Court Hearing to decided whether to approve the FTC's application for injunction blocking the proposed merger between Whole Foods Market Inc (NASDAQ: WFMI) and Wild Oats Markets Inc (NASDAQ: OATS).
FDA 8am Gastrointestinal Drugs and Drug Safety and Risk Management Joint Advisory Committee Hearing on Biogen Inc's (NASDAQ: BIIB) Tysabri for Crohn's Disease.
Starbucks Corporation (NASDAQ: SBUX) to report Q3 earnings; conference call at 5pm. After recent sluggish stock performance, some analysts see Starbucks snapping back in the quarters ahead: Starbucks is expected to add a breakfast sandwich at 4,000 stores/coffee houses, which could increase per-store revenue by $70K annually.
Thursday August 2
Eastman Kodak Company (NYSE: EK) to report Q2 earnings; conference call at 11am. Note that the volatility in Kodak is elevated going into its earnings report.
Whole Foods Market Inc. (NASDAQ: WFMI) CEO John Mackey deserves the gold medal for understatement for calling his anonymous posts on Yahoo message boards an "error in judgment" in one of the least convincing apologies ever. Monumental stupidity is more like it.
What puzzles me about this issue is why a rich, successful and well-regarded CEO like Mackey would even care about the opinions of a bunch of chat board clowns? Is he really that narcisstic that he needs to constantly prove to his greatness? That's really kind of sad when you think about it.
Mackey now is making shareholders pay the price for his insecurity. The Wall Street Journalreports today that the SEC has launched an informal probe of his conduct. In particular, regulators are going to see if Mackey gave overly optimistic statements on the message boards, the paper said.
A special committee of the board also is investigating the matter, which came to light in part because of the regulatory review of its planned acquisition of Wild Oats Markets Inc. (NASDAQ: OATS) which has encountered stiff opposition.
Mackey, who co-founded Whole Foods, seems to be most sorry that he got caught. Any lower-level executive who did what he did would have been at a minimum reprimanded and possibly fired. Though Mackey says he meant no harm, he still needs to be taught a lesson.
Whole Foods should strip him of any options grants awarded to him this year. Mackey should also reimburse the company for any costs its incurred to defend him. Oh yeah, he should be banned from ever posting information on Yahoo chatrooms even under his own name.
He ought to have better things to do with his time.
SEC chairman Christopher Cox wants Congress to tighten its oversight of the $2.4T municipal bond market, the result of increasing complexities in the bond market and lax leadership at a number of firms, reported the Wall Street Journal.
OTHER PAPERS:
Kohlberg Kravis Roberts is planning to offer $24M to acquire Macy's Inc (NYSE: M), according to Women's Wear Daily (subscription required).
Honda Motor Co. (NYSE: HMC) is increasing its production capacity in North America and in other places, in order to meet growing demand for its fuel-efficient cars and to maintain momentum for global growth, reported the Associated Press.
Although 
Antitrust is always tough to predict. The laws are sketchy -- and markets can change quickly. Besides, politics can play a big role.
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