The Friday Fishwrap

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Whole Foods gets a green light on Wild Oats buyout...Late Thursday a federal judge gave a tentative green light to supernatural grocer Whole Foods Market, Inc.'s buyout of industry rival Wild Oats Markets, Inc. In his ruling, the federal judge rejected comments from the U.S Federal Trade Commission (FTC) that the deal would stifle competition and lead to higher retail prices. The federal judge, Paul L. Friedman, denied a request from the FTC to temporarily block the $565 million deal. Judge Friedman's reasoning behind his decision was filed in a 93-page document that was sealed because it contains corporate secrets. The federal government, led by the FTC, has said it would appeal such a ruling.

The FTC could appeal the ruling to a higher court, and industry observers say it's likely the FTC will seek a stay of the ruling pending appeal. Whole Foods and Wild Oats both said they have agreed with the FTC to not close the deal prior to noon on Monday, August 20, 2007. Absent a stay pending appeal the two grocers could close the deal anytime after noon on August 20th.

Commentary:
This tentative green light given by judge Friedman is the first step for Whole Foods in finalizing the Wild Oats buyout. It seems the FTC is determined to appeal the decision but it isn't likely they will get anywhere with their appeal, although they might hold up the buyout for some time.

In terms of the anti-competitive issue, it just doesn't wash. This is the same FTC that gives the ok to mega financial industry and oil industry mergers, two industries in which there are real anti-competitive and pricing issues. However, when it comes to a niche industry like natural foods retailing, the FTC gets out it's guns and does battle. Talk about mixed up priorities. Supernatural grocers like Whole Foods and Wild Oats are actually competing more with supermarkets--especially upscale retailers--than they are with other natural foods store retailers. This is even more true for Whole Foods.

Unfortunately, the days of independent natural foods stores competing with Whole Foods are pretty much gone, with a few exceptions. Additionally, even combined, Whole Foods and Wild Oats are relatively small players in the overall retail grocery industry. Look at it this way, Whole Foods currently has 190 stores. Wild Oats has about 110 stores. That gives Whole Foods 300 stores after the buyout--and they will likely need to close a number of the Wild Oats stores. (Whole Foods already plans on selling 35 of Wild Oat's Henry's and Sun Harvest banner stores and a distribution center in Southern California to a subsidiary of Los Angeles-based retailer Smart & Final, Inc.)

That store count is about the same of many regional supermarket retailers. In California alone regional grocers Save Mart and Raley's Superstores each have close to 300 stores and only serve the northern and central portions of the state. Safeway Stores, Inc. has double the Whole Foods/Wild Oats combined store count in California alone. So the anti-competitive argument just doesn't wash.

The second main argument that the Whole Foods buyout of Wild Oats will lead to higher prices is just on the face of it laughable. You can tell the FTC staff doesn't know much about Whole Foods' business model. Whole Foods already gets a premium price point in their stores--and Wild Oats has never been enough of a competitor to have ever forced Whole Foods to lower its retails except for a short period of time when, for example, they were launching a new store in a new city or neighborhood. Whole Foods will increase it's retails (and margins) when it feels the particular market it's in will bare it. Buying Wild Oats--which currently exerts minimal competitive pressure on Whole Foods--will not be a causative factor if and when Whole Foods increases it's retail prices.

In fact, it's the Kroger's and Wal-Mart's of the retailing world who have already caused Whole Foods to review--and in some cases lower--it's retails on natural and organic groceries and related goods. This is another example of why Whole Foods' primary competition today is supermarket retailers and a few mass merchandisers, and other natural foods retailers are a distant second in terms of Whole Foods competition.

The FTC needs to let this buyout bloom. Let Whole Foods and Wild Oats get to the busy task at hand of integrating Wild Oats into Whole Foods. Let the Wild Oats employees know who their new employer is rather than making them wait in limbo as the FTC appeals the deal.

Combining Wild Oats intoWhole Foods will actually be better for consumers. Whole Foods is the superior grocer of the two. They will bring their merchandising style and corporate mission to the Wild Oats stores, which will help not hurt. The additional store count will allow Whole Foods better bargaining power with vendors; and I doubt if there will be any price increases of any kind for some time after the buyout/merger. Whole Foods management is way to smart for that.

So let the Whole Foods buyout bloom FTC. There are petroleum oligopolies out their requiring your attention, massive financial industry consolidation, and billion dollar anti-competitive, no bid contracts, going to defense contracting firms that didn't even exist a few years ago. Priorities, priorities. You can rest assured American consumers will be just fine--actually better--when Wild Oats becomes part of Whole Foods Markets, Inc. You did a good job reviewing the buyout, as you should. Now it is time to let it go through.

(The writer owns no stock in either Whole Foods Markets, Inc.or Wild Oats Markets, Inc.)

Notes: You can read the text of the Federal Trade Commission press release opposing judge Friedman's decision here:http://www.ftc.gov/opa/2007/08/wholefoods.shtm
You can read Whole Foods Markets, Inc.'s press release in response to judge Friedman's ruling here:
http://www.wholefoodsmarket.com/investor/pr07_08-16.html

Personality profile brief...Speaking of the Whole Foods Market, Inc. and Wild Oats Markets, Inc. buyout/merger, one food industry financier who stands to make a large pot of gold off the deal is Los Angeles California-based billionaire Ron Burkle. When Wild Oats was at its lowest corporate point a few years ago Burkle stepped in and made a major investment in the company through his Yucaipa Companies investment firm. Today Burkle is Wild Oats' largest outside investor, owning about 15% of the grocer's outstanding stock shares.

Burkle, who started working in the retail grocery business as a young bag boy, and later was an executive with Stater Bros.Markets in Southern California, made his fortune by buying, consolidating and selling supermarket chains primarily in Southern California. His Yucaipa Companies firm formed a large retail grocery company called Food For Less Holdings Inc., made up of a number of different retail grocery companies banners, which he acquired. He then bought the Ralph's Grocery Company, Southern California's market share leader neck to neck at the time with the Von's Companies. He also had retail holdings outside California as part of Food For Less Holdings, Inc. Burkle eventually sold this company to Kroger, and it made him a billionaire.

Since that sale Burkle, who also is close personal friends and was a major financial donor to former President Bill Clinton, has used the Yucaipa Companies to invest in many other retail grocery companies, either holding his shares for a time and selling at a profit, or helping to engineer buyout or mergers. Burkle also was a major donor to Clinton's Presidential Library and supports the former President's charitable foundation with generous donations. Burkle and former President Clinton also have a business relationship in that the ex-President is a member of the Yucaipa Companies' board of directors. Yucaipa Companies currently has ownership stakes in Pathmark stores and Supervalue, in addition to Wild Oats in the retail grocery industry.

Burkle also had been involved in making bids in companies outside the grocery industry in recent years. Most recently he was involved in trying to put together an investment group to acquire the Los Angeles Times newspaper, and then it's parent company Tribune Media Group. His group didn't get the deal but he continues to look closely at other media investments, an area that seems to interest him of late. Various financial publications have had him interested in The Gannet Newspaper chain and Dow Jones, the parent company of the Wall Street Journal, which was just purchased by media-mogul Rupert Murdock

Whole Foods has offered $18.50 per share for the Wild Oats stock. Burkle's share price when he made his investments was just a fraction of that. Since he owns 15% of Wild Oats he stands to make a substantial windfall from the deal. However, he also took a substantial investment risk in investing in Wild Oats at the time he did so. There was talk at the time about a possible bankruptcy filing, and most industry players and observers had basically counted the grocer out. Burkle not only invested in Wild Oats but he took a fairly hands on role in terms of CEO selection and other operational aspects of the grocer's business. Most industry people also believe Burkle played a major role in engineering the Whole Foods/Wild Oats buyout/merger. Few would suggest that based on his risk and involvement he doesn't deserve the pay off in the deal.

The proceeds from the Whole Foods/Wild Oats deal will give Burkle and his Yucaipa Companies a major infusion of new capital--so it's likely Yucaipa Companies will be looking for their next major retail grocery industry investment soon. Yucaipa has a keen eye for retail grocery chain investments, so any company they invest in is watched closely by Wall Street as well as the industry.

News Briefs, factiods and information

Stater Bros. Markets, a stallworth supermarket retail chain based in Southern California's Inland Empire region, is making a massive investment. The chain, which operates 163 stores in the Inland Empire region, is spending $300 million on a new 2.1 million square-foot distribution center in San Bernardino, California. This facility will allow Stater Bros. to consolidate it's now 11 distribution building, which are in seven seperate locations in four nearby cities. The combined total size of these 11 buildings is 1.6 million square feet. The new facility will not only give Stater Bros. one central location but considerable more square footage as well. David Merrefield, Editorial Director for Supermarket News, has a good editorial on the Stater Bros. investment in the August 13, 2007 online issue of the publication. You can read David Merrefield's editorial on the Stater Bros. investment here:http://supermarketnews.com/viewpoints/stater_bros_makes/

Fresh & Easy opening fast & breezy...Mega British retailer Tesco plans to have 30 of it's Fresh & Easy Neighborhood Markets open by Christmas. The retailer also says it plans to have an additional 20 stores opened by February, 2008. Beyond that Tim Mason, Tesco's CEO for U.S operations, says the British-based international retailer has 100 more locations in the pipeline. Stores are set to open in the October-November, 2006 time frame. Mason says the first 12 stores will all be in Southern California.

The 10,000 square-foot Fresh & Easy Neighborhood Markets are a hybrid convenence store/small supermarket/food service concept. The stores will merchandise fresh, high quality prepared foods, specialty and natural foods, a full line of persihables in every category, and have many other unique features for a format of that size, in addition to selling basic grocery items. Mason says the new stores are going to be in areas with different demographics and income ranges.

The July-August, 2007 issue of the publication Cooperative Grocer, has a short feature article on a brand new 17,000 square foot cooperative supermarket that recently broke ground in Northampton, Massachusetts. The market, named RiverValley Market, is scheduled to open in early 2008. One of the market's focuses will be on purchasing and selling locally grown products as much as it can. Cooperatives are often lost when it comes to natural and specialty foods marketing today. But there are hundreds of co-op markets still in the U.S. and as this article suggests new ones continue to open. You can read the article from Cooperative Grocer here: http://www.cooperativegrocer.coop/articles/index.php?id=741