Making Amazon Whole
The tie-up between Amazon and Whole Foods is likely to benefit both companies as well as consumers due to the multitude of innovations and synergies it will give way to
Amazon and growth seem to be interchangeable and profits are a dirty word. This stringent desire for growth has lead to some of the most intriguing M&A transactions globally. Most notably was Amazon’s acquisition of Whole Foods for $13.7bn, an all-cash transaction financed by a mixture of bridge loans and balance sheet cash.
As the name suggests, Whole Foods is a premium US grocer, and the acquisition signals Amazon’s desire to enter the $800bn food market and truly fulfil Bezo’s ‘omni-store’ mantra. The transaction provides Amazon with a significant “Brick and mortar” presence, ironically the same business area that has seen a gradual decline as a result of the price efficiency of Amazon’s online business. Whole Foods however will be no exception to this price slashing strategy; within months of the acquisition prices had fallen by up to 40%. Amazon has introduced their prime membership into the grocery shopping experience, with prime members seeing further cuts to their grocery bills. This represents a form of revenue synergies, since it expands Amazon Prime’s already significant roster of perks and benefits. Furthermore, profits are unlikely to be significantly reduced by the lower prices, in part thanks to the significant negotiating power Amazon will have. This will create food deflation pressures, benefitting consumers but still allowing Amazon to retain profits. Furthermore, lower prices are likely to invoke further consumer loyalty, increasing the longevity of prime membership. The stock market had predicted these rapid changes months ago at the moment of the acquisition, and as a result of the “Amazon effect” competitors such as Kroger, Walmart and Costco Wholesale lost 9.2%, 4.7% and 7.2% respectively. Cost synergies arise from the likely amalgamation of distribution lines, with the Whole Food’s distribution channels potentially being replaced by Amazon’s already significant distribution lines.
In terms of financial metrics, the deal has an EV/EBITDA of 11.1x. According to the New York business school, firms in the grocery sector have an EV/EBITDA of around 11.6x. This quick comparative analysis demonstrates a highly competitive transaction, not only in terms of price but also expected revenue and cost synergies. Amazon paid $42 per share, a 27% premium relative to the Friday prior. Furthermore, as an all cash transaction and Amazon’s Price to Earnings ratio of 185x vs Whole Food’s 34x, will clearly be incredibly accretive for shareholders.
Amazon already has plans to combine its data collection abilities with Whole Foods’ to target customers with alternative offerings and further discounts. However, worries have been raised with regards to the impact on privacy. Monitoring people’s grocery may seem mundane and not particularly note-worthy, but cumulatively it adds another layer of information that we freely provide to Amazon.
To conclude, despite the privacy risks voiced, the transaction is incredibly unique because it appears to offer a win-win. Amazon benefits from access to millions of customers and an instant share in brick and mortar retail. Whole Foods, a business struggling to make profits pre-acquisition due to a falling customer base has seen this instantly reversed thanks to Amazon’s stewardship. Unless some horrific new information arises out of this deal, the Amazon-Wholefood transaction promises an exciting future for grocery shopping.