On 6/16, Amazon.com, Inc. (NASDAQ:AMZN) announced an agreement to acquire WFM, a leading organic grocer, for $13.7bn or $42/sh in cash. Amazon will maintain the WFM brand, and John Mackey will remain CEO. This is Amazon’s largest M&A deal, and represents 3% of market cap and 64% of cash. While not that material financially, the pending deal has big implications for the grocery & retail sectors; Accelerates Amazon’s entry into grocery, May suggest Amazon will need to acquire Intl. stores, Implies physical stores/scale may be necessary in grocery (more consolidation), and Potential for more grocery pricing competition in US.
Per the latest 10-Q, WFM operates 461 stores, with 440 in the US, 12 in Canada, and nine in the UK, as well as 15 distribution centers. WFM locations are over-indexed to higher income, higher density urban markets (Prime synergies). WFM's locations provide Amazon with a large retail presence, which it could use to offer online order and in-store pickup or use locations as mini-fulfillment centers for local delivery. The stores can also showcase other AMZN products such as Kindles, Echos, and private label consumer goods. Grocery has low online penetration (3% in 2015 vs 15% for eCommerce).
Deal price represents a 0.86x EV/Sales and 11.1x EV/EBITDA multiple on FY17 (vs. historical industry M&A multiples of 0.6x EV/Sales and 8.3x EV/EBITDA on LTM basis). BofA Merrill Lynch Retail analyst Robby Ohmes forecasts WFM FY17 rev. of $16bn, roughly 10% accretion to BAML's 2017 AMZN rev. forecast of $166bn. WFM is forecast to generate $722mn in FY17 EBIT (4.5% margin), and WFM could be slightly accretive if 5% debt is used to finance the deal. WFM could also be 40bps accretive to Amazon's nonAWS operating margin, though Amazon could reinvest WFM profits to drive growth.
While the WFM deal has broad implications for Amazon (physical locations are a major shift in strategy), no change on the firm's thesis on the stock. Bank of America Merrill Lynch thinks that adding stores will improve Amazon’s position in a big category, and it thinks investors will continue to favor AMZN’s ambitious drive to go after big market opportunities. Risk is that physical stores will lower growth or returns on capital, impacting Amazon’s valuation multiple.