Whole Foods Deal: Will it be a game changer for Amazon

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Amazon’s announcement that it was buying Whole Foods Market for $13.7 billion threw the entire retail industry into a tizzy Friday — and with good reason.

June 16th was one heck of a day for market observers when Amazon.com stunned the investment world with the announcement that it had entered into a merger agreement with bricks and mortar grocery store chain Whole Foods for $42 per share. Whole Foods has more than 460 stores in the US, UK and Canada.

Over the years, Amazon has repeatedly demonstrated itself to be an incredible innovator in the retail space since their emergence on the scene roughly two decades ago. Jeff Bezos, the 53-years old founder of Amaon has all the potential to change the dynamics of retail space.

Source: The Washington Post

For years, Jeff Bezos and his company has burst into new areas of business introducing the ease and efficiency of shopping online by bringing books, electronics, clothes, household items and some food items, often at low prices, to shoppers’ front doors. Now, they seem poised to do it again to the grocery business.

Amazon has agreed to buy up Whole Foods for $42 per share. This represents a roughly 27% premium over where the company’s shares traded for previously and values the business at approximately $13.42 billion. This excludes debt, which will bring the deal’s value up to $13.7 billion. Amazon has stated that the transaction will be all cash in nature.

Source: USA Today

Purchasing Whole Foods gives it new leverage to expand its online grocery and delivery business, which already includes Amazon Fresh, it’s own grocery delivery service in limited markets such as New York, Chicago, Los Angeles and San Francisco. Its presence will force regional grocery stores and online grocery delivery services to step up their service.

We will have to wait and see about whether or not Amazon will take on debt to make the deal work. As of the end of its latest fiscal quarter, Amazon’s cash and cash equivalents stood at $19.33 billion and its marketable securities came out to $6.65 billion, so they technically can do this without debt, but do they want to give up valuable liquidity and the prospect of a tax shield?

It is also to be seen that will Amazon change Whole Foods or will Whole Foods change Amazon? Will Amazon sacrifice Whole Foods quality for the sake of better pricing, or will Amazon use its logistical prowess to slash Whole Foods’ prices without cutting quality?

We will have to wait and see.