Whole Foods Market (WFM), again

another bidder?

WFM and Amazon (AMZN) announced late last week that the two firms had agreed to a friendly deal under which AMZN would acquire all the shares of WFM for $42 each in cash.

Since the announcement, WFM share have traded on very large volume and almost continuously at prices above the deal.

What does this mean?

deal mechanics

If I’m a holder of WFM and the current deal stands, I’ll receive $42 a share from AMZN in, say, three months.  The value of that future $42 today is slightly less.  It’s $42 minus the interest I could earn on the money in the intervening three months.  Let’s say that amount is $0.25.

If I believe the deal is a sure thing, then, I should pay no more than $41.75 for an AMZN share today.  However, there’s always some risk that the deal will be called off.  The possibilities may be far-fetched–a government agency might forbid the acquisition, there might be something funky in the WFM financial statements…  This means the $41.75 is a ceiling, not a floor, on the stock price.  Typically, trading starts below the present value of the future payment and gradually approaches it as the deal gets closer, and as possible obstacles are cleared.  The amount below varies from deal to deal, depending on perceived risks.

Ithink WFM should probably be trading, at best, in the $41.25 – $41.50 range now, rather than at around $43.

the difference

The $1.50 difference represents a bet by the market that another, better, offer will emerge.  As a practical matter, most often these bets turn out to be correct.  Maybe it’s because the bettors have deep industry knowledge or maybe because they’re acting on information from/about another potential acquirer you and I are not privy to.

For me, this will be an interesting case to watch, since I can’t figure out who the other buyer might be.



One response

  1. Jana.

    Take it private. Bring in people who can sell groceries.

    WF (the company not the stock) has a problem that they are trying to sell organic cheese puffs (I am not kidding) rather than selling food.*

    The problem is John Mackey who has done so much but reached his sell by date. Keeping him is the problem, not the solution.

    I am not all convinced that Amazon can improve the customer experience — although it is so bad that I guess anyone could. I am very convinced that Amazon will do a terrible job selling food. They’ve already hired BCG to do $300 in cuts.

    * look at what Eatly can do with that concept of selling actual food.

    ** if a Blue Apron is worth 3.4B — and WF is only worth 13.5 — says a lot about valuation.

    That all said I don’t think you can compete against amazon on price — for the company.

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