by Ian Harvey
June 18, 2017
Amazon.com, Inc. (NASDAQ:AMZN) announced Friday that it is acquiring Whole Foods Market, Inc. (NASDAQ:WFM), for $42 per share in an all-cash transaction of about $13.7 billion, including Whole Foods' debt – which is a 27% premium to its closing price Thursday. The deal implies a $13.4 billion market cap for the natural and organic grocer. The deal is expected to close in the second half of this year.
Amazon stock closed Friday trading up 2.44%, whilst Whole Foods Market was up 29.10%. This was certainly a great profit maker for those that had call options on WFM.
This is not to say that the deal doesn’t make sense, because it aids Amazon's efforts to break into the grocery business and grows its customer base, as Whole Foods' brand would resonate massively with the Amazon customers as Whole Foods' stores could become a ready-made distribution network, and it could help source Amazon's food delivery business– but simply leads to the following question – is this surge finished or is there still more to be made on the deal?
There is some belief that there is still plenty of positive action to be had, particularly using a call option, due to speculation that:-
1. Shareholders are not getting a fair deal from the buyout, and
2. Other retailers may do anything to keep the retailer out of Jeff Bezos' hands.
Shareholders not getting a fair deal
An investigation is being conducted in regard to whether the board members of Whole Foods Market, Inc. may be in breach of fiduciary duty to shareholders in relation to the planned sale of Whole Foods to Amazon.com, Inc. This investigation was launched several months prior to the announcement by Whole Foods on June 16, 2017, that a merger agreement had been entered into whereby Amazon would acquire Whole Foods for $42 per share in cash.
The investigation is based on concerns of possible failure of the Whole Foods board to fulfill their obligation to company shareholders. There is some question as to whether the board thoroughly investigated alternatives to the acquisition as well as doubt over whether the board secured a good enough price for shares of the Whole Foods stock. The price target of $47 per share given by one Wall Street analyst corroborates suspicion over whether the proposed deal price was entered into with sufficient consideration by the Whole Foods board.
Other retailers may do anything to keep the retailer out of Jeff Bezos' hands
The response from grocery chains and other food and household product retailers to the acquisition has been strongly negative. This business sector could be seriously impacted if Amazon brings its cut-throat pricing and strategy into physical locations.
This deal is likely to kick off a bidding war for Whole Foods Market Inc.
The market reaction and the deal's price tag provide speculation that a topping bid may arrive for Whole Foods. A strategic retail buyer may try to steal Whole Foods from Amazon, or at least force the online giant to pay up for the acquisition.
“An analyst from Barclays has already raised their price target to $48, and were forthcoming in their opinion that they could see an upside price for Whole Foods of as much as $57 per share”.
As well, “Oppenheimer analysts also say Amazon may be undervaluing Whole Foods' brand name strategy and its strong retail locations, and that means another bidder — or Amazon —could have to pay more. Oppenheimer analyst Rupesh Parikh raised his price target to $45.”
If a bidding war ensues, consider the following options trade recommendation…..
** OPTION TRADE: Buy the WFM NOV 17 2017 42.000 CALL at approximately $1.20. Sell price is left to your own judgment.
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Best of Trading,
Director of Stock Options Made Easy