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Tuesday, February 16, 2010

Ron Burkle's Rather Excellent One Year Investment Adventure With Whole Foods Market

It's been just over a year since legendary supermarket industry magnate, investor, philanthropist and friend of Bill Clinton, Ron Burkle (pictured at left), acquired a 7% stake (9.8 million shares) in natural-organic foods grocery chain Whole Foods Market, Inc. Burkle reported his stake in a SEC regulatory filing on January 8, 2009.

During the about two month period from late November 2008 -to- early January 2009 in which Burkle made his investments in Whole Foods' common stock through his Yucaipa Companies' investment firm, the natural-organic foods grocer was aisle-deep in two key struggles: it's battle with the U.S. Federal Trade Commission (FTC) over the acquisition of Wild Oats Markets Inc.; and a loss in sales due to the economic recession.

As a result of these two key factors, Whole Foods' stock share price ranged from $9.97 per share (November 24, 2008) to $10.01 per share (January 7, 2009) during the period when Burkle made his $98 million worth of stock purchases, resulting in the 7% total ownership stake in the company. We will call it an average of about $10 per share.

Today, a mere year later, Whole Foods Market. Inc. reported a whopping 79% increase in earnings for its first quarter fiscal year 2010 over the same period in 2009.

Additionally, first quarter 2010 sales increased 7% to $2.6 billion, compared to the same quarter last year. Further, same store sales, which are a key measure of a retailer's health, increased by 2.5%. Complete details are here.

Whole Foods' first quarter sales and profits report announcement today sent the natural-organic grocery chain's stock share price soaring. At the end of business today Whole Foods Market, Inc. stock was trading at $32.95 per share.

The stock has been growing like naturally-fertilized clover over the past 12 months. The 52- week low is $9.06. The 52-week average high is $34.40 per share.

Ron Burkle's excellent one year Whole Foods Market adventure

Speaking of naturally-fertilized clover, Ron Burkle is certainly waist deep in it in terms of his about 13 month profit in Whole Foods Market, Inc. stock.

Based on the average price of $10 per share he made from late November 2008 -to- early January 2009, the supermarket magnate and investor has more than tripled the value of his $98 million stake in Whole Foods in just slightly over a year.

Based on the $10 per share average purchase price, at today's $32.95 per share close, Burkle has seen a whopping per share increase of $22.95. Not bad for a one-year investment adventure.

Trust in Whole Foods board, senior management

In this story [Retail Memo - Exclusive: Supermarket Industry Investor Ron Burkle Looking For A Seat On Whole Foods Market's Board of Directors] on January 16, 2009, we reported that Ron Burkle was interested in seeking a seat on Whole Foods Market Inc.'s board, based on his 7% stake in the company.

However, to date Burkle has been satisfied to be a passive investor in the natural-organic grocery chain - a position that has obviously paid off for the supermarket industry investor.

We stick by the January 2009 report that Burkle did have an interest, however strong or weak, in possibly joining the board. But it obviously wasn't something he has pushed, since if he did we doubt Whole Foods would deny him a spot. And if the grocer did, we would have heard about it. We haven't.

Historically, Burkle has been what's referred to as an activist shareholder, an investor who buys a substantial stake in a company and then participates in some way in its operations, generally as a member of its board and often times operationally. This has been especially the case for Burkle regarding his numerous investments and acquisitions in the food and grocery retailing industry.

But it appears to date that Ron Burkle has trust in Whole Foods' current board and senior management - a trust well-founded based on the growth of the investor's just over one year investment - and as such sees no need to join the board.

Burkle hasn't been a traditional passive investor when it comes to Whole Foods Market though. In fact, we are aware that over the last year Burkle has offered numerous ideas and suggestions, including involving Whole Foods value strategy, to the grocer's board members and senior management.

But of course Burkle isn't merely a investor in supermarkets - he has extensive operations experience as an food and grocry retailing executive.

He started out in the grocery retailing business as a bag boy for the Los Angeles-based Stater Bros. supermarket chain, where he eventually became a vice president.

In addition, Burkle was the board chair of Wild Oats Markets Inc., and was instrumental in the natural grocer's merger with Whole Foods.

Ron Burkle also put together one of the biggest supermarket chain's in the U.S. - Ralphs/Food 4 Less - which he eventually sold to Kroger Co. This was what earned him the 'supermarket magnate" nickname.

Burkle focusing on books not groceries right now

Interestingly, today Yahoo, of which Burkle is an investor and has been a member of the board of directors since 2001, announced that the investor is stepping down from its board because he wants to "devote more time to his other business interests."

In the statement, Yahoo Chairman Roy Bostock said: "Yahoo and its stockholders have benefited greatly from the counsel, insights and objectivity Ron has brought to the company during his nine years on the board."

The key business interest we think Burkle wants to devote more time to is his current investment focus on the Barnes & Noble book store chain.

Burkle recently disclosed in an SEC regulatory filing that his Yucaipa Companies investment firm has acquired a 19% ownership stake in the bricks-and-mortar and online book retailer. Additionally, in that filing Burkle said he would like to own as much as 37% of Barnes & Noble.

Barnes & Noble has an anti-takeover provision which makes it difficult for investors like Burkle to acquire majority ownership in the company, something that's been suggested he would like to do. However, if he can acquire as much as 37% (and even a bit less) of the bookstore chain, Burkle will have significant influence, including a seat (and maybe even chair) on the retailer's board.

It sounds to us like we will see the "activist shareholder" Burkle rather than the more passive investor Burkle when it comes to his run on Barnes & Noble.

In fact, his profits so far in Whole Foods Market, Inc. could provide a nice cash cushion should he decide to sell some shares for his investment in Barnes & Noble.

We have no information however that Burkle plans on cashing-in any part of or all of his investment stake in Whole Foods.

Either way, it's been a rather excellent 'One Year Whole Foods Market Investment Adventure' for the supermarket magnate.

We even suppose it's been an excellent enough one year adventure to make the legendary investor willing to take a crack at one of the most difficult retailing segments in U.S. - book selling.

Monday, April 6, 2009

Retail Memo: David Wales, Who Headed Up the FTC's Nearly Two Year Legal Challenge Against Whole Foods' Acquisition of Wild Oats is Leaving the Agency

FTC v. Whole Foods Market, Inc.: Settlement Agreement Post-Mortem

David P. Wales, the Acting Director of the U.S. Federal Trade Commission's (FTC) Bureau of Competition, and the man who in that role spearheaded the nearly two year antitrust legal challenge by the regulatory agency against Whole Foods Market, Inc.'s acquisition of Wild Oats Markets, Inc., is leaving the FTC to, as they say, pursue other interests.

Mr. Wales' departure comes just one month after the FTC and Whole Foods Market reached a settlement agreement over the Austin, Texas-based natural grocery chain's 2007 acquisition of Wild Oats Markets, its then main rival in the natural foods retailing class of trade segment.

New FTC Chairman Jon Leibowitz offered some strong praise about the departing Acting Director of the FTC's Bureau of Competition, which among other tasks is charged with enforcing antitrust regulations and bringing charges of antitrust violations involving mergers and acquisitions, saying about Mr. Wales: "Dave has done a terrific job in leading the Bureau of Competition during an active period of antitrust enforcement and a successful time for the agency in court. American consumers owe him a debt of gratitude, and all of us at the Commission are grateful that Dave agreed to stay on to help ensure a smooth transition."

Chairman Leibowitz's comment about Wales' staying on has to do with the fact that he was the Bureau of Competition's Acting Director.

Mr. Wales joined the FTC in April 2006 as Deputy Director of the Bureau of Competition.

As Acting Director of the competition bureau since August 2008, he has supervised nearly 300 lawyers and staff in the merger and non-merger enforcement divisions and led the bureau in bringing more than 20 enforcement actions, according to Chairman Leibowitz.

According to the FTC's public affairs office, David Wales directed several litigated enforcement efforts that blocked proposed corporate mergers in CCS/Newpark Environmental Services, Oldcastle/Pavestone, and CCC/Mitchell.

In CCC/Mitchell, the Bureau obtained the first preliminary injunction order from a district court in nearly seven years.

Wales also led the Bureau in challenging several consummated mergers in court, including Polypore/Microporous and Ovation Pharmaceuticals, both of which are still pending, and he oversaw the continuing litigation and subsequent March 6, 2009 settlement involving Whole Foods/Wild Oats.

He also helped lead the FTC in obtaining important relief for consumers in other merger matters, including Reed Elsevier/ChoicePoint, Fresenius/Daiichi Sanyo, Dow/Rohm & Haas, King Pharmaceuticals/Alpharma, Hexion/Huntsman, Teva/Barr Pharmaceuticals, Herff Jones/American Achievement, Getinge/Datascope, and Lubrizol/Lockhart, according to the FTC's public affiars office.

Additionally, according to the public affairs office, in the anticompetitive conduct area, Mr. Wales oversaw the Bureau’s two lawsuits against pharmaceutical firms that entered into exclusion payment agreements – Cephalon and Solvay Pharmaceuticals.

The departing head of the competition bureau also helped lead the FTC in obtaining critical relief for consumers in other conduct matters in the health care, retail, consumer product, and real estate industries, including Dick’s Sporting Goods, Boulder Valley Independent Practice Association, AllCare IPA, Inverness, ESL Partners/ZAM Holdings, West Penn MLS, National Association of Music Merchants, and Bristol-Myers Squibb, the FTC says.

Further, in the energy sector, Mr. Wales oversaw several regional gas price investigations, as well as the Commission’s rulemaking to prohibit market manipulation in the petroleum industry, according to the FTC Office of Public Affairs.

David Wales' departure in many ways helps turn the page on the FTC v. Whole Foods Market, Inc. legal case and overall issue. As the Assistant Director of the Bureau of Competition in 2007 Mr. Wales played a major role in the FTC's challenging Whole Foods' acquisition of Wild Oats Market's in 2007.

And as the bureau's Acting Director since August 2008, Mr. Wales was in-charge of the FTC's legal challenge against the deal until the settlement agreement was reached on March 6 of this year.

The first page-turner at the FTC was the naming in late February, 2009 by President Obama of then FTC Commissioner Jon Leibowitz as the regulatory agency's new Chairman. Just a couple weeks after Mr. Leibowitz took over as the FTC's new Chairman, the agency reached the March 6 settlement agreement with Whole Foods Market, Inc., as we reported and wrote about in this piece: Daily Memo: It's A Done Deal: Whole Foods Market and the FTC Reach A Settlement Agreement On Wild Oats' Acquisition Antitrust Challenge.

Take our word for it, that timing wasn't accidental. The fact a settlement agreement was reached so soon after Chaiman Leibowitz assumed his position involved more cause than effect in turns of the settlement deal getting done. Chairman Leibowitz is a registered Democrat but was appointed an FTC Commissioner by Republican President George W. Bush. [Suggested reading: Retail Memo - Breaking: FTC Commissioner Jon Leibowitz Odds On Favorite to Be Named Chairman; Positive Development For Whole Foods' Settlement Talks.]

FTC Chairman Leibowitz has yet to announce who will replace David Wales as the competition bureau's chief. However, we expect the Chairman's choice to be a person who is proactive and strong on antitrust actions, as well as consumer protection issues. Mr. Leibowitz has said he plans strong enforecemnet of both antitrust, competition and consumer protection during his tenure at the FTC.

Meanwhile, perhaps the FTC, as a gesture of good will, should have one of the Washington, D.C. Whole Foods Market stores provide the food and drink, paid for by taxpayers of course, for David Wales' retirement party from the regulatory agency.

After all, it at least would be a small gesture in terms of giving Whole Foods Market, Inc. and its shareholders a little cash back towards the about $30 million the natural grocery chain spent defending the company against the taxpayer-financed, wrong-headed, nearly two-year false premise-based antitrust challenge to Whole Foods' acquisition of Wild Oats, which tried as it might in 2006-2007 to find a buyer, but couldn't until Whole Foods Market, Inc. came along.

It's just a thought.

Reader Notes:

>Natural~Specialty Foods Memo (NSFM) predicted that the settlement agreement between WHole Foods Market, Inc. and the FTC would have as its central proposition or condition the divestment and sale of certain stores by Whole Foods. We were correct. You can read an overview piece about it here: Retail Memo: The FTC-Whole Foods Market Settlement Agreement Looks Much Like Our January 'Blueprint-Template For A Settlement Deal' Proposal
>Follow Natural~Specialty Foods Memo (NSFM) on Twitter.com at www.twitter.com/nsfoodsmemo.

>Below is a linked bibliography to Natural~Specialty Foods Memo's (NSFM) coverage and analysis of FTC v. Whole Foods Market and related issues and topics.

FTC v. Whole Foods Market, Inc. Recent Bibliography

Post March 6, 2009 Settlement Agreement:

March 31, 2009: Retail Memo: The 'Legal Times' Offers A Legal Legacy of the FTC-Whole Foods' Settlement Agreement; We Offer an Antitrust Case Blast From the Past

March 19, 2009: Retail Memo: Whole Foods Market Opens New Store in Santa Cruz, California Today ... And There's Plenty of Competition

March 12, 2009: Retail Memo: Whole Foods Market is Selling Brand 'Wild Oats'- We Offer Three Retailers We Suggest Could Benefit From Buying the Brand

March 8, 2009: Retail Memo: The FTC-Whole Foods Market Settlement Agreement Looks Much Like Our January 'Blueprint-Template For A Settlement Deal' Proposal

March 6, 2009: Daily Memo: It's A Done Deal: Whole Foods Market and the FTC Reach A Settlement Agreement On Wild Oats' Acquisition Antitrust Challenge

Pre-Settlement Agreement

March, 2009:

Tuesday, March 31, 2009

Retail Memo: The 'Legal Times' Offers A Legal Legacy of the FTC-Whole Foods' Settlement Agreement; We Offer an Antitrust Case Blast From the Past

FTC v. Whole Foods Market, Inc. - Post Mortem

As regular readers of Natural~Specialty Foods Memo (NSFM) are aware, we've been reporting on and offering extensive analysis about the U.S. Federal Trade Commission (FTC) v. Whole Foods antitrust case, which ended on March 6, 2009 in a mutual settlement agreement signed off on by both the FTC and Whole Foods Market, Inc. [Regular and less than regular readers alike can click here to view a recent bibliography of our FTC v. Whole Foods Market, Inc. coverage.]

Potential FTC-Whole Foods settlement legal legacy

In today's Legal Times, a professional legal trade journal, writer Jenna Green has an interesting piece about the potential legal legacy of the FTC-Whole Foods Market, Inc. antitrust settlement, in which the FTC dropped its nearly two year attempt to overturn the 2007 acquisition of then Wild Oats Markets Inc. by Whole Foods, in return for Whole Foods Market, Inc. (the combined Whole Foods-Wild Oats) agreeing on March 6, 2009 to sell 13 current operating stores, 19 closed stores, and the Wild Oats brand and related intellectual property.

As we've written, the agreement is much ado about nothing, as the net result of it actually is to only force Whole Foods to sell the 13 existing operating stores.

The 19 closed stores are...well, already closed. Many were already on the market for sale prior to the March 6 settlement agreement.

And Whole Foods has essentially killed the Wild Oats brand since acquiring the company in 2007. Therefore, selling the brand and its related intellectual property, assuming a buyer even emerges, won't materially hurt Whole Foods, except that the natural grocery chain would most likely prefer to see the brand die rather than possibly get brought back to life by another food retailer.

But the Legal Times piece offers a look at the settlement agreement from more of an antitrust legal precedent perspective in that it suggests the divestiture agreement (selling the stores) between the FTC and Whole Foods could set an example for future deals.

Such agreements between government regulators and merging and acquiring food retailing chains aren't really new however.

An antitrust blast from the past: The American Stores - Lucky merger

For example, in a major case in California in the late 1980's, then state Attorney General John Van de Kamp held-up the post-acquisition integration of the Lucky Stores supermarket chain by then Salt Lake City, Utah-based American Stores Company (which was later acquired by then Boise, Idaho-based Albertsons, Inc., which was later acquired by Supervalu, Inc. and private equity firm Cerebus) until American Stores agreed to divest a number of its existing Alpha Beta and acquired Lucky stores in the state.

American Stores was at the time the third-largest supermarket chain in the U.S., after Kroger and Safeway.

A brief history: Right after the deal was announced, Van de Kamp asked the Federal Trade Commission to void it, claiming that a combined (over 400 stores in California) Lucky-Alpha Beta would cost California consumers $400 million by reducing competition. The FTC refused to void the deal, although it did force the divestiture of 37 Alpha Beta stores, which were sold in December 1988, the same month 38 Lucky stores in Arizona were also sold.

Van de Kamp then took his case to court, and on September 29, a federal judge in Los Angeles issued a preliminary injunction against the merger. American Stores appealed, and in April 1989, an appeals court judge in San Francisco overturned the injunction. Van de Kamp appealed this reversal to the U.S. Supreme Court.

In April, 1990 the U.S. Supreme Court ruled in favor of the California attorney general. Subsequently, and wishing to avoid additional, lengthy litigation, American Stores reached an agreement with Van de Kamp, whereby the company was allowed to convert 14 Alpha Beta stores to the Lucky name, but also had to sell--within five years--161 southern California stores -- 152 Alpha Beta markets and nine Lucky supermarkets.

Sound familiar? The difference though was that in the American Stores case there were real antitrust results in our analysis because (1) the combined Lucky-Alpha Beta stores gave American Stores Company too much of a supermarket concentration in California; and (2) the stores were supermarkets, where the majority of shoppers, especially in the late 1980's, bought there food.

The concentration therefore didn't offer consumers enough competitive choice in the market (California), although despite the merger there still was quite a bit of competition, mostly from Safeway and numerous regional chains and independents.

At the time, Lucky was the number two market share leader in Northern California, after Safeway. Alpha Beta was number two. The deal put the combined Alpha Beta and Safeway about tied for number one in Northern California, eliminating an independent number two, Lucky.

The combined Lucky and Alpha Beta placed as the number two market share leader in Southern California. Vons and Ralphs were prior to that numbers one and two. Lucky a very strong number three. Alpha Beta number four. The deal eliminated a strong, independent number three, Lucky.

We essentially agree with the U.S. Supreme Court and the California Attorney General on the merits of the American Stores-Lucky merger, although we would have been a bit less harsh on the number of stores the company was ultimately forced to sell. It was too many.

After the multi-year legal challenge and resulting store sell-off, American Stores never was able to get its footing back as a supermarket chain, despite its increased size. It eventually sold the company to then Boise, Idaho-based Albertsons, Inc., which also went away a couple years ago when Supervalu, Inc. and the private equity form Cerebus acquired it.

In an ironic twist, Cerebus bought what was then Albertsons' Northern California division in the Albertsons, Inc acquisition with Supervalu, Inc., which included all of the former Lucky banner supermarkets in that part of California. Albertsons had long before changed the name of the former Lucky stores to Albertsons. In 2007 Cerebus sold the division to Modesto, California-based Save Mart supermarkets. After operating the about 200 Northern California Albertsons stores for a number of months, Save Mart decided that rather than rebrand them as "Save Mart," which it originally planned to do, it would rebrand the Albertsons banner stores back to the old Lucky name, which is the banner they fly under today.

Whole Foods on the other hand is a niche retailer. And as we've argued, a combined Whole Foods-Wild Oats never presented any anti-competitive threat in 2007, or today.

Below (in italics) is the first part of the piece in today's Legal Times by Ms. Greene. After the text, just click the link to read the full story.

Having covered and written about FTC v. Whole Foods Market, Inc. extensively since the deal was announced in the summer of 2007 -- and still doing so in what we are calling our "post mortem pieces -- Natural!~Specialty Foods Memo (NSFM) suggests reading Ms. Greene's piece, as she does an excellent job detailing the antitrust legacy post settlement.

Whole Foods-Wild Oats Deal Leaves Controversial Legacy
By Jenna Greene
Legal Times
March 31, 2009

As corporate mergers go, the purchase of natural foods grocer Wild Oats by its rival Whole Foods Market looked like small potatoes (organic yellow fingerling, perhaps). Nobody expected the proposed $565 million acquisition to spark a food fight of epic proportions.

But on March 6 -- after two years, $28 million in legal fees and expenses, and dozens of lawyers -- Whole Foods cut a deal to end the battle. And the Federal Trade Commission carved another notch in its reputation for aggressive antitrust enforcement.

The most important result of the battle may be a controversial opinion out of the U.S. Court of Appeals for the D.C. Circuit that some fear will make it too easy for the FTC to effectively block future mergers. As one antitrust expert says, "so long as their lawyers don't get up there and fall asleep at the podium," the FTC wins. Less than a week after Whole Foods and the FTC settled, a $1.4 billion merger collapsed in part due to the D.C. Circuit opinion.

As for the dispute over merging grocery chains, it's not clear who actually won. The FTC, which snatched significant concessions from the jaws of initial defeat, asserts it came out on top. "Obviously, [the settlement] wasn't the maximum relief we could have obtained," says David Wales Jr., acting head of the FTC's Bureau of Competition, discussing the case at length for the first time. "But we feel it substantially restores competition and did so a lot sooner than if we had continued to litigate."

Whole Foods points out that the merger survived; it wasn't forced to unscramble all the eggs. "It was a settlement -- nobody got what they wanted," says lead lawyer Paul Denis, a partner in Dechert's D.C. office. "If everybody leaves unhappy, you must have gotten it right."

Still, agreeing to divestitures in the face of an antitrust agency's opposition looks a lot like business as usual. Why did Whole Foods spend so much money to reach that settlement? In retrospect, the company may have been too determined to go toe to toe with the FTC -- and caught off-guard by the FTC's similarly battle-ready approach.

GOING FROM 0 TO 60

When the merger between the two grocery chains was announced on Feb. 21, 2007, analysts' reaction was largely positive. UBS called it "a slam dunk," while Morningstar said it was "strategically and financially sound." No one, it seems, had any inkling of the antitrust train wreck ahead. Standard & Poor's was lukewarm on the deal for the opposite reason: The stores faced "increased competition from traditional grocers."

Whole Foods, which is based in Austin, Texas, didn't even start off with specialized antitrust counsel -- it used its M&A lawyer, Bruce Hallett of Dallas' Hallett & Perrin, to submit the required pre-merger notification, a 15-page form with information about each company's business. Whole Foods, with 194 stores, would buy Boulder, Colo.-based Wild Oats, which owned 110 stores total, 74 of them under the Wild Oats brand, for $18.50 per share of stock. The two chains were prime competitors in just 22 markets.

While the FTC and the Justice Department's Antitrust Division sometimes fight over which agency will review a merger for its potential effects on competition, supermarket mergers have always gone to the FTC.
"In the overwhelming majority of cases, it makes absolutely no difference which agency reviews a merger," says Ronald Wick, an antitrust partner at Baker Hostetler not involved in the case.

But as Whole Foods would soon discover, sometimes differences in the two agencies' statutory authority can prove crucial.

The filing was routed to the FTC Mergers IV group, which specializes in retail sector transactions. The deal, Wales says, "quickly jumped out as having potential overlap, potential competitive significance." A partner at Cadwalader, Wickersham & Taft before joining the FTC in 2006, Wales, 39, has been acting director of the Bureau of Competition since Jeffrey Schmidt left in August 2008.

A team quickly took shape. Mergers IV lawyers led by Assistant Director Matthew Reilly began gathering information, talking to the parties, their competitors, and their customers. Less than three weeks later, on March 13, 2007, the agency issued a second request for documents. "It was not a close call," Wales says.

Even before the second request was officially made, Whole Foods got the hint that trouble loomed. But in seeking experienced counsel, it still looked for a familiar firm. The company turned to antitrust lawyer Neil Imus and commercial litigator Alden Atkins, partners in the D.C. office of Houston-based Vinson & Elkins. Atkins had previously handled litigation for Whole Foods involving a store in Washington, D.C. Although Whole Foods would run the litigation, Wild Oats retained Clifford Aronson of New York's Skadden, Arps, Slate, Meagher & Flom.

If settlement with the FTC was desirable or even possible at that point, Whole Foods' lawyers had little time to explore the option. They were too busy fulfilling the second request. The companies turned over 16.5 million pages of material, one of the largest document productions in recent agency history. While once this would have meant 10,000 boxes stacked in a conference room, the data largely came on hard drives -- along with a computer virus. ("Obviously we didn't think they did it on purpose," Wales says). Dozens of FTC staff lawyers began their review.

Then on June 6, 2007, the FTC filed suit in U.S. District Court for the District of Columbia seeking a preliminary injunction to halt the merger. All five commissioners -- three Republicans, one Democrat, and one independent -- voted in favor of bringing the case.

[Click here to read the full story from today's Legal Times.]

[You can follow Natural~Specialty Foods Memo on Twitter.com at www.twitter.com/nsfoodsmemo.]

Sunday, March 8, 2009

Retail Memo: The FTC-Whole Foods Market Settlement Agreement Looks Much Like Our January 'Blueprint-Template For A Settlement Deal' Proposal

The FTC - Whole Foods Market, Inc. Settlement Agreement

The four members (their normally are five but the FTC is currently one short) of the U.S. Federal Trade Commission (FTC) voted unanimously on the settlement deal with Whole Foods Market, Inc., announced on Friday, March 6, ending the nearly 20-month legal battle waged by the FTC to overturn the 2007 friendly acquisition by Whole Foods Market of Wild Oats Markets, Inc. [Read the details of the settlement agreement in our March 6 piece here: Daily Memo: It's A Done Deal: Whole Foods Market and the FTC Reach A Settlement Agreement On Wild Oats' Acquisition Antitrust Challenge.]

Additionally, the 4 -to- 0 unanimous vote in favor of a settlement by the FTC's Commissioners came just eight days after President Obama named the only Democrat on the FTC, Jon Leibowitz, as its new Chairman, and just a few days after Chairman Leibowitz officially assumed the duties of FTC Commission Chairman.

[Read: Daily Memo: Whole Foods Market - FTC Settlement Deal Watch - Countdown to March 6, And: Daily Memo: Whole Foods Market - FTC Settlement Deal Watch - 9 Days to March 6. And: Retail Memo - Breaking: FTC Commissioner Jon Leibowitz Odds On Favorite to Be Named Chairman; Positive Development For Whole Foods' Settlement Talks.]

Below is a link to the press release issued by the FTC on Friday, March 6, announcing the settlement deal ending its antitrust legal challenge to Whole Foods Market's 2007 acquisition of Wild Oats:

[Link: FTC Consent Order Settles Charges that Whole Foods’ Acquisition of Rival Wild Oats was Anticompetitive.]

Below is the key quote from FTC Commissioner Jon Leibowitz in the March 6 press release regarding why the federal regulatory agency responsible for antitrust enforcement and consumer protection decided to reach and agree to a settlement with Whole Foods Market, Inc., despite for 20 months saying it's goal was to overturn the acquisition in order to preserve competition in what it called the "premium natural and organic retailing segment (PNOS) in a number of U.S. markets:

"As a result of this settlement, American consumers will see more choices and lower prices for organic foods,” said FTC Chairman Jon Leibowitz. “It allows the FTC to shift resources to other important matters and Whole Foods to move on with its business."

Although we've previously suggested the two parties should reach a settlement agreement in numerous pieces beginning some time ago, Natural~Specialty Foods Memo (NSFM) formally called for the FTC and Whole Foods Market, Inc. to reach a settlement on the legal case in this January 29, 2009 piece, where we focused the argument on the need for a settlement to be reached: Retail Memo - Breaking: Whole Foods Makes Settlement Offer to FTC; FTC Halts Action For 5 Days; Natural~Specialty Foods Memo Calls For A Settlement.

In that call for a settlement, we said achieving a settlement is important in part so that the FTC can move on to more important matters, including finding real antitrust cases to challenge, and so that Whole Foods Market can get back to what it does: merchandising and selling natural and organic food and grocery products.

In other words, FTC Chairman Leibowitz basically says in the March 6 press release what we said in our January call for a settlement, as well as in a number of stories prior to that.

In our January 29 piece, [Retail Memo - Breaking: Whole Foods Makes Settlement Offer to FTC; FTC Halts Action For 5 Days; Natural~Specialty Foods Memo Calls For A Settlement], we also offered a settlement blueprint or template for the FTC and Whole Foods. The basis of the settlement blueprint comes from the reporting, writing about and analysis we've been offering on the deal and antitrust challenge since the summer of 2007.

Below is a part of what we offered in the January piece:

A settlement blueprint or template

"In other words, the universe of stores we are talking about regarding a post-merger, combined Whole Foods-Wild Oats isn't much more than 100 nationally throughout the U.S. in these 29 markets where the FTC deems Whole Foods Market, Inc. a PNOS segment monopoly.

Our argument since the summer of 2007 has been that a post-merger, combined Whole Foods-Wild Oats isn't a monopoly. [You can read a recent story in which we made our argument as to why that's the case at the link here: Retail Memo: Natural-Organic Foods and U.S. Retail Marketplace Realities; Why the FTC's Case Against the Whole Foods-Wild Oats Merger is Pure Folly.]

However, looking at FTC v. Whole Foods Market, Inc. today from a completely practical standpoint, we see no reason why the FTC and the natural grocer should not be able to achieve a settlement. After all, we are talking about a universe of just slightly more than 100 stores that the FTC is saying a "PNOS" category monopolist (Whole Foods) makes. We're also talking about just 29 specific U.S. markets. These two key facts need to be the starting point for negotiation, we suggest.

The FTC and Whole Foods need to look at each of these 29 markets and the number of stores the combined Whole Foods-Wild Oats has in each of the markets. Both parties then need to do an independent competitive analysis on each of these markets, including in the analysis not just natural foods class of trade retailers but also food retailers that are hybrid natural-organic-specialty supermarkets. These include retailers like Gelson's and Bristol Farms in Southern California, Raley's and Andronico's Markets in Northern California, The Fresh Market (chain), which has stores in the south, Midwest, Mid Atlantic and eastern regions, Wegmans in the east, Haggen Foods in the Pacific Northwest, and the numerous other natural-organic-specialty "hybrid" chains that fit this category in the 29 markets designated as monopolist by the FTC.

Once this real competitive analysis is done in the 29 U.S. markets, the FTC and Whole Foods then need to agree on Whole Foods' closing an agreed upon number of those 100-plus former Wild Oats stores in each of the respective markets. There still might remain 29 of those markets after the independent competitive analysis work is done, which is something that can be completed in a matter of a few days. But there also could be fewer than 29 remaining after the analysis.

The burden in the FTC's administrative process is on Whole Foods in reaching a settlement, that's why the natural foods grocery chain reached out to the FTC and submitted a settlement offer. In return the FTC suspended action on the case for five days. We think thus far that's a positive spirit of cooperation.

As all lawyers and negotiators know, first time settlement offers are seldom accepted. Instead they tend to be the opening entree to get settlement talks started. Whole Foods has served that opening entree with its offer. The FTC has responded in kind with the temporary halt of legal activity. Both moves are good negotiation openers. After all, another thing all good negotiators know is that the best negotiations come when both sides give a little something right at the start." [Read the entire story here.]

What we suggested is essentially the framework the FTC used in arriving at the settlement deal.

The FTC required (and the natural grocer agreed) Whole Foods Market, Inc. to put up for sale 32 stores -- 13 stores (12 former Wild Oats units and one existing Whole Foods unit) currently in operation and 19 stores that already have been closed, some by Wild Oats before the Whole Foods Market acquisition, the others closed by Whole Foods post-acquisition. [Read the details, including a list of the stores to be sold, here.]

Additionally, the FTC required Whole Foods to put the Wild Oats brand and associated intellectual property up for sale. This is really nothing to Whole Foods since if it thought the Wild Oats brand had value to the company it would be using it in some way. Instead, Whole Foods has intentionally shelved the Wild Oats brand. Now perhaps it can even make a few bucks from selling it.

[Of course, in the dynamic and interesting world of food retailing anything can happen. Perhaps Mike Gilliland, the founder of Wild Oats and now founder and CEO of fast-growing Boulder, Colorado-based Sunflower Farmers Market, will buy the brand from Whole Foods and bring back the Wild Oats name in the form of a chain of natural foods stores bearing the banner. For example, Sunflower is opening stores in Whole Foods' hometown market of Texas. However, because of what likely is a trademark issue with a natural foods store in Texas that uses the "Sunflower" name, the natural grocer has renamed its thus far handful of Texas' stores "Newflower." Wouldn't it just be ironic if Gilliland bought the Wild Oats brand from Whole Foods Market, Inc. and instead changed the name of the Texas stores to "Wild Oats"? It's intellectual property and retail brand marketing food for thought. And you read it here first.]

So, in a nutshell, the FTC seems to have used a very similar process to the one offered in our blueprint-template to arrive at a settlement deal; the key element of such a settlement agreement being, as we suggested, having Whole Foods agree to sell some selected stores in return for the antitrust regulator dropping its legal action, so that both parties could move on to doing what they should respectively be doing, antitrust enforcement and consumer protection for the FTC, and selling natural-organic groceries for Whole Foods Market.

We think the settlement is a good one for Whole Foods.

Reader Resource: Below are links to all of the FTC-filed information on the settlement deal with Whole Foods Market, Inc.:

>Agreement Containing Consent Orders
>Decision and Order [Public Record Version]
>Order To Maintain Assets
>Analysis of Agreement Containing Consent Orders To Aid Public Comment
>Commission Letter Approving the Divestiture Trustee Agreement
>Divestiture Trustee Agreement [Public Record Version] [Appendices B, D, and E Redacted]
>Amended Part 3 Administrative Complaint [Issued on September 8, 2008]
>News Release
>Order Withdrawing Matter From Adjudication

Friday, March 6, 2009

Retail Memo: The 'Whole Bibliography' - FTC v. Whole Foods Market Antitrust Case & Issue

Daily Memo: It's A Done Deal: Whole Foods Market and the FTC Reach A Settlement Agreement On Wild Oats' Acquisition Antitrust Challenge

FTC v. Whole Foods Market, Inc. - Settlement Deal Reached

Whole Foods Market, Inc. and the U.S. Federal Trade Commission (FTC) have reached a settlement agreement deal in the FTC antitrust case against Whole Foods' 2007 acquisition of Wild Oats Markets, Inc., doing so on the last day in which the FTC had agreed to halt its legal proceedings in the case.

Below (in italics) is what we said yesterday in this piece [ Daily Memo: Whole Foods Market - FTC - Settlement Deal Watch - Countdown to March 6] about the down-to-the-wire settlement negotiations between Whole Foods Market, Inc. and the FTC:

"The FTC imposed the halt last month after Whole Foods brought an offer of settlement to the U.S. Federal Government agency responsible for antitrust enforcement and consumer protection.

According to our sources, the Whole Foods market settlement offer included the selling of a certain number of former Wild Oats stores now converted to the Whole Foods' brand in some of the 29 U.S. markets where the FTC claims a combined Whole Foods-Wild Oats is a monopoly in what the FTC calls the "premium natural and organic retailing segment (PNOS)."

Natural~Specialty Foods Memo (NSFM) first reported in February, 2009 that the initial settlement offer made to the FTC by Whole Foods, the action that started the settlement talks, included an offer by the natural grocery chain to divest some of the former Wild Oats stores as the key ingredient of a settlement agreement. We are the only publication we can find that reported this.

Today, Whole Foods Market, Inc. announced it has reached a settlement with the FTC over the long legal battle, saying the key element of the settlement involves just what we said it would above, which is the divestiture of a number of stores.

Whole Foods will sell 31 Wild Oats stores and other assets to settle the FTC's antitrust challenge, the natural grocery chain and the government agency responsible for antitrust enforcement and consumer protection said today.

Pursuant to FTC protocol, the settlement agreement has been placed on public record for a 30-day comment period ending April 6, 2009, after which the FTC will issue a final ruling.

The settlement agreement: Under the terms of the agreement, a third-party divestiture trustee has been appointed to market for sale:

~Leases and related assets for 19 non-operating former Wild Oats stores, 10 of which were closed by Wild Oats prior to the merger and nine of which were closed by Whole Foods Market;

~Leases and related fixed assets (excluding inventory) for 12 operating acquired Wild Oats stores and one operating Whole Foods Market store (13 total); and

~Wild Oats trademarks and other intellectual property associated with the Wild Oats stores.

"We are pleased to have reached a mutually-satisfactory agreement with the FTC. We believe it was in the best interests of all our stakeholders to resolve this matter so we can dedicate our full attention to selling the highest quality foods available in our inviting store environments," John Mackey, chairman, chief executive officer, and co-founder of Whole Foods Market," said in a statement today.

"It will be business as usual in the 13 operating stores to be marketed for sale. We are committed to serving our shoppers by continuing to operate these stores in the manner our customers deserve and expect. We will be offering Team Members in stores that are sold the choice of either a guaranteed job offer in another store or an enhanced severance package."

Terms and conditions of the settlement agreement: The divestiture trustee will have six months to market the assets to be divested. For any good faith offers that are not finalized by the divestiture trustee during the six-month period, an extension of up to six months may be granted. This twelve month period may be further extended to allow the FTC to approve any purchase agreements submitted within that time period. The only other obligations on Whole Foods imposed by the settlement agreement are in support of the divestiture trustee process.

According to Whole Foods Market, Inc., after receiving final approval on the terms of the settlement deal by the FTC, which is expected prior to April 30, 2009, the natural grocery chain expects to record a non-cash charge of approximately $19 million or less relating to the potential sale of the 13 operating stores.

These stores had combined sales of approximately $31 million in the first quarter of fiscal year 2009, or approximately 1.3 percent of the Company’s total sales of $2.5 billion, Whole Foods said today.

The natural grocery chain says it will incur some cash expenses relating to legal and trustee fees which are not expected to be material. No material additional charges are expected related to the 19 closed properties, for which a lease liability reserve is already recorded, or related to the trademarks which have been fully amortized.

The addresses for the 13 operating stores offered for sale in the settlement deal are:

7133 N. Oracle Rd., Tucson, AZ
8688 E. Raintree Dr., Scottsdale, AZ
2584 Baseline Rd., Boulder, CO
1651 Broadway St., Boulder, CO
3180 New Center Pt., Colorado Springs, CO
5910 S. University Blvd., Littleton, CO
9229 N Sheridan Blvd., Westminster, CO
340 N. Main St., West Hartford, CT
4301 Main St., Kansas City, MO
1090 St. Francis Dr., Santa Fe, NM
7250 W. Lake Mead Blvd., Las Vegas, NV
19440 N.W. Cornell Rd., Hillsboro, OR
6930 S. Highland Dr., Salt Lake City, UT

[Note that 12 of the 13 operating stores are located in the Western U.S. Only one, the store located at 340 N. Main St., West Hartford, CT, is outside of the western states. This is because the Western U.S. region was the primary U.S. market region the FTC claimed Whole Foods Market held its strongest "monopoly" in, in what the FTC called the "premium natural and organic retailing segment (PNOS)." Also, note the high number of stores in Colorado (5 of the 13), which is where Wild Oats Markets, Inc. was headquartered. No problem there for Whole Foods -- it has two too many stores in Boulder anyway. And the two stores in Boulder for sale are two units Whole Foods has been struggling to decide to keep or dump. It would have likely kept them for political reasons. But now being forced to sell them is actually a blessing in disguse. Want to bet the two Boulder stores were offered up in Whole Foods' initial settlement offer to the FTC?]

The addresses for the 19 non-operating Wild Oats stores offered for sale are:

5350 W. Bell Rd., Glendale, AZ
1422 N. Cooper Rd., Gilbert, AZ
874 E. Warner Rd., Gilbert, AZ
9028 W. Union Hills, Peoria, AZ
13823 N. Tatum Blvd., Phoenix, AZ
15569 W. Bell Rd., Surprise, AZ
200 W. Foothills Pkwy., Fort Collins, CO
8194 S. Kipling Pkwy., Littleton, CO
6424 Naples Blvd., Naples, FL
4600 Shelbyville Rd., St. Matthews, KY
87 Marginal Way, Portland, ME
8819-8833 Ladue Rd., St. Louis, MO
7831 Dodge St., Omaha, NE
517 N. Stephanie St., Henderson, NV
4879 S. Virginia St., Reno, NV
5695 S. Virginia St., Reno, NV
2077 N.E. Burnside St., Portland, OR
17711 Jean Way, Lake Oswego, OR
3736 W. Center Park Dr., West Jordan, UT

[Note that 15 of the 19 non-operating stores are located in the Western U.S., with only four stores outside the market region. The reason for this is the same as above.]

Some head-scratching in order

This is a reasonable settlement deal for both parties, in our analysis, although since we've argued beginning in 2007, right after the FTC issued its legal challenge against Whole Foods Market's friendly acquisition of Wild Oats in 2007, that the FTC's monopoly argument and antitrust action was pure folly, it wasn't a needed deal.

Putting that aside, it is a settlement offer that could have been acheived long ago, saving Whole Foods Market, Inc. (and its shareholders) millions of dollars in legal fees, and saving the American taxpayer a likely equal amount in expenses incurred by the FTC "on behalf of American consumers," not to mention being able to have focused the FTC's resources in other, more important, areas instead of its aggressive attempt to overturn the deal.

But at least its a settlement, something we called for months ago.

And it could actually be a positive one in some respects for Whole Foods, particularly the solution to the two Boulder, Colorado stores (two of the 13 operating stores to be sold), and the selling of the six closed stores in Arizona, which is a market region that's overstored, and in which grocers are suffering seriously because the state has been hit so hard by the housing foreclosure mess, financial crisis and economic recession. The grocers suffering the most in Arizona are upscale retailers like Whole Foods market and others.

Additionally, the settlement deal really amount to Whole Foods Market only having to sell 13 stores, since the 19 stores already have been closed and the natural grocery chain would love to sell them anyway. That's nothing folks.

But right now, we're going to fix ourselves a cheese plate (artisan of course), along with some organic grapes and whole grain crackers on the side, and pour a glass of bio-dynamically-produced, organic red wine, while we then engage in some focused head-scratching over why, after all these many months of laboring to overturn the deal, the FTC now agreed on a reasonable settlement deal which it should have proposed itself at least one year ago.

But stay tuned, as we have an upcoming analysis piece on the Whole Foods Market, Inc. - FTC settlement agreement coming up.

Background summary: FTC v. Whole Foods Market, Inc.

The FTC challenged Whole Foods Market's August 28, 2007 acquisition of Wild Oats Markets, Inc. shortly after the two companies announced the deal.

Prior to completion of the acquisition, the FTC filed a motion in the United States District Court for the District of Columbia seeking a preliminary injunction to enjoin the acquisition. The FTC had also filed a complaint commencing an administrative proceeding challenging the acquisition.

On August 16, 2007, the United States District Court for the District of Columbia denied the FTC’s motion for a preliminary injunction.

The FTC appealed denial of the preliminary injunction motion to the United States Court of Appeals for the District of Columbia Circuit and on July 29, 2008 the Court of Appeals reversed the District Court and remanded the case to the District Court for further proceedings.

On remand, the FTC renewed its motion for preliminary injunctive relief pending resolution of the administrative action, specifically seeking a hold separate order, the rebranding of all former Wild Oats stores, and the appointment of a trustee or special master to establish an independent management team for the former Wild Oats assets and oversee Whole Foods Market’s compliance with the order.

The administrative proceeding was scheduled to commence on April 6, 2009. On January 28, 2009, the FTC issued an order granting Whole Foods' motion to withdraw the administrative case from adjudication for the purpose of considering a proposed consent agreement that would resolve the administrative proceeding. A further order dated February 4, 2009 extended the withdrawal through March 6, 2009.

On March 6, 2009 Whole Foods and the FTC reached a settlement deal.

Natural~Specialty Foods Memo