Tuesday, December 2, 2008

Retail Memo: Whole Foods Market, Inc. Closes $425 Sale of Stock to Private Equity Firm; Adds Members of the Firm to its Board of Directors

Whole Foods Market, Inc. today closed on the sale of $425 million (about 17% of the company) worth of its Series A 8.00% Redeemable Convertible Exchangeable Participating Preferred Stock (aka: the good stuff) to Green Equity Investors V, L.P., Green Equity Investors Side V, L.P. and Thyme Coinvest, LLC, all affiliates of Leonard Green & Partners, L.P., a Southern California-based private equity investment firm.

As part of its substantial investment stake in Whole Foods Market, Inc., Leonard Green & Partners, L.P. placed two representatives, Jonathan A. Seiffer, a partner at the investment firm, and Jonathan D. Sokoloff, a managing partner, on Whole Foods' corporate board of directors effective today.

Mr. Seiffer is a partner with Leonard Green & Partners, L.P., and has been at the firm since 1994. He presently serves on the board of directors for David's Bridal, Inc., The Sports Authority, Inc., The Tire Rack, Inc., and Varsity Brands, Inc.

Mr. Sokoloff is a managing partner with the private equity firm, which he joined in 1990. Currently, he serves on the boards of several retail companies including The Container Store, David's Bridal, Inc., Jetro Cash & Carry, Inc., Rite Aid Corporation, The Sports Authority, Inc., The Tire Rack, Inc., and Varsity Brands, Inc.

Additionally, Whole Foods Market, Inc. named two other new board members today. They are: Stephanie Kugelman, vice chairman emeritus of Young & Rubicam Inc. and chairman of A Second Opinion strategic consulting group, and Kip Tindell, chairman and CEO of The Container Store.

If you read closely, you can see Leonard Green & Partners, L.P.'s Jonathon D. Sokoloff, one of the investment firm's two members now on the Whole Foods board, also sits on the board of retailer The Container Store. Kip Tindell, chairman and CEO of The container store is one of the four new Whole Foods board members named today. Leonard Green & Partners is a major investor [The Container Store® Engages New Financial Partnership With Leonard Green & Partners, L.P. ] in The Container Store, as listed on the firm's Web site here.

From an interlocking aspect therefore, this gives the private equity firm three seats on Whole Foods Market, Inc.'s board, which is considerable representation.

We haven't found a connection between Stephanie Kugleman and the private equity firm at this point. However, the fact Whole Foods Market, Inc. is announcing her appointment to the board as the fourth new member, on the same day it is announcing three other new members, two with a direct relationship and one with a very close relationship to Leonard Green & Partners L.P., does beg the question (and the curiosity) as to if Ms. Kugleman also has a professional relationship of some sort with the private equity firm.

Stephanie Kugleman is a near 40-year pioneer in the advertising industry. Ms. Kugelman is vice chairman emeritus of Young & Rubicam Inc. (Y&R) and chairman of A Second Opinion strategic consulting group. Her previous position was vice chairman chief strategic officer of Young and Rubicam brands. Prior to that, she was chairman and CEO of the New York flagship office of Young and Rubicam.

Leonard Green & Partners creates multi-billion dollar funds [Leonard Green & Partners Closes $5.3 Billion Private Equity Fund] which it uses, as private equity firms do, to either acquire or take significant and major equity stakes in companies. It then, in the case of acquisitions, reworks the companies, selling them for a profit down the road. In the cases where it takes a significant equity stake (and the approximate 17% equity stake for $425 million in Whole Foods is fairly significant) it generally participates actively in those companies' operations rather than being a passive investor.

Putting two members of the firm on Whole Foods' board, as well as a third, the CEO of The Container Store which the private equity firm is a major player in, demonstrates in our analysis that the private equity firm plans to take a very active role in Whole Foods Market, Inc. going forward; a role commensurate with its $425 million investment.

Leonard Green & Partners L.P. is a major investor in numerous companies, including the following major retailers: the Rite Aid drug chain, luxury retailer Neiman Marcus Group, Petco, sporting goods chain Sport's Authority and a few others. Click here for all of the firm's current investments.

According to the private equity firm's Web site, none of the current company's it holds investment stakes in are in the natural foods or natural products industry, accept Whole Foods Market, Inc., although as we mentioned above they are heavily involved in the retailing sector.

The firm was founded in 1989. It says it follows this investment philosophy.

The three managing partners, John G. Danhakl, Peter J. Nolan, Jonathan D. Sokoloff, who run Leonard Green Partners L.P., all once worked at the formerly high-flying Drexel investment bank in Los Angeles, which was founded by Michael Milken, who was convicted of multiple counts of fraud in the "go-go" 1980's.

Jonathan Sokoloff, who is joining Whole Foods Market, Inc.'s board, has food retailing board of directorship experience, having once served on the board of the Alaska-based supermarket chain Carr-Gottstein Foods Co., which today is a part of Safeway Stores, Inc. -- it's Carr's banner stores in Alaska.

Managing partner John Danhaki also has food retailing board experience. He currently is on the board of directors of Arden Group, the company that owns and operates the upscale Gelsons and Mayfair supermarket chains in Southern California. He's also a former member of the board of the mega-drug chain Rite Aid.

This industry expertise among the firm's principals and its significant presence on Whole Foods' board, combined with the size of the firm's investment and its track record for being involved in the companies it invests in, suggests to us Leonard Green Partners L.P will take an active roll in Whole Foods Market, Inc. in relation to the size of its stake in the company.

The investment comes at a crucial time for Whole Foods as its stock price is at a historic low and sales are suffering in large part because of the economic recession. It's our experience and analysis though that such investments come at a price (not a negative or positive comment). As a result, we expect some restructuring and changes at Whole Foods as is tries to weather the current economic recessionary storm, as well as figure out the chain's future direction and positioning, which it needs to do.

1 comment:

Anonymous said...

Looks like a prelude to a possible buyout to me. I believe Ron Burkle owned far less than 17% of Wild Oats and he was able to engineer the Whole Foods acquisition of Wild Oats. With three Leonard Green guys on Whole Foods' board, that's a major voting block, not to mention very influential since they will work together.