Morningstar

Sound Strategy Behind Amazon-Whole Foods Tie-Up

Sound Strategy Behind Amazon-Whole Foods Tie-Up
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Amazon.com Inc
(AMZN)

On June 16, wide-moat Amazon announced it plans to acquire narrow-moat Whole Foods Market in a $13.7 billion all-cash deal. This equates to $42 per share or around a 25% premium to our fair value estimate and the prior market close.

Whole Foods has been under pressure from activist investor Jana Partners to reignite its operations and unlock value. From our vantage point, we think a sale offered the best investor outcome given the intense competitive pressures facing the grocery business, and Amazon is paying toward the top of the range of what we figured the business could fetch.

This deal could also be advantageous as Whole Foods works to right its ship and drive efficiencies across its operations, given that Amazon has developed a very powerful and disruptive brand that has become synonymous with competitive pricing, expedited shipping, and customer service.

From Amazon's point of view, the deal gives the firm the opportunity to gain a larger brick-and-mortar presence, as well as access to higher-quality fresh food fare.

We intend to raise our $33.50 fair value estimate for Whole Foods to the deal price as we don't foresee another bid surfacing before the expected close in the second half of 2017. We expect to see little change to our $1,050 fair value estimate for Amazon, given the small relative size of the deal.

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About the Author

Erin Lash, CFA

Sector Director
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Erin Lash, CFA, is a sector director, AM Consumer, for Morningstar*. In addition to leading the sector team, she covers packaged food and household and personal care companies. Beyond managing a team of nine analysts and associates covering an array of consumer firms, Lash also conducts fundamental analysis of 13 multi-billion-dollar market capitalization firms in the packaged food and household and personal care space.

Before joining Morningstar in 2006, Lash spent four years as an investment analyst covering retail, transportation, and technology firms for State Farm Insurance. In this capacity, Lash analyzed financial statements, business strategy, and fundamentals of owned companies and potential investments, presenting her recommendations based on this analysis to State Farm portfolio managers for ownership consideration.

Lash holds a bachelor’s degree in finance from Bradley University’s Foster College of Business. She also holds a master’s degree in business administration, with concentrations in accounting and finance, from the University of Chicago Booth School of Business. Lash has completed the Chartered Financial Analyst® designation. She ranked second in the food and tobacco industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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