We see the strategic benefits of the Whole Foods merger, but given the small relative size of the deal we expect little change to our Amazon fair value estimate.
Erin Lash, CFA
09:15 AM | Email Article
On June 16, wide-moat Amazon
announced its intentions to acquire narrow-moat Whole Foods Market
in a $13.7 billion all-cash deal, which equates to $42 per share or around a 25% premium to our fair value estimate and the prior market close. The transaction is valued at a forward enterprise value/EBITDA multiple of 11 times.
Erin Lash, CFA, is a director of consumer sector equity research for Morningstar.
We intend to raise our $33.50 fair value estimate for Whole Foods to the deal price (adjusted for the time value of money), as we don't foresee another bid surfacing before the expected close in the second half of 2017. Despite the strategic nature of the deal for Amazon--affording the firm the opportunity to gain a larger brick-and-mortar presence, as well as access to higher-quality fresh food fare (which stands to benefit its ambitions to expand its fresh grocery offerings)--we see little change to our $1,050 fair value estimate, given the small relative size of the transaction (around a low-single-digit percentage of sales).
Whole Foods has been under pressure to reignite its operations, challenges that were brought to the forefront following the 9% stake taken by activist investor Jana Partners earlier this year, as it petitioned the firm to make operational improvements and/or pursue a sale. We had believed that a sale offered the best investor outcome, and had believed the firm could fetch between 9 and 11 times adjusted EBITDA (or a price in the mid-$30s to mid-$40s). As such, we portend this represents a favorable outcome for Whole Foods, in light of the intense competitive pressures that had been weighing on its business.
Further, from our vantage point, because Amazon has developed a very powerful and disruptive brand intangible asset that has become synonymous with competitive pricing, expedited shipping, and customer service--all of which underpin our wide moat rating--we think this deal could be advantageous as Whole Foods works to right its ship and drive efficiencies across its operations.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.