WFM is a great company, but in our view, as an independent entity, it was
no longer a
because its best growth days were in the rear-view mirror. Nevertheless, we
are always on the lookout to buy a cheap stock if we believe it can reach
its fair value in a timely fashion and provide a reasonable return. WFM was
an attractively priced stock because the company was going through some
challenging times. Ultimately, we believed that either management would be
able to fix the issues, or someone else would. That “someone else” is now
The offer was slightly above the mid-point of our
intrinsic value estimate range. The WFM discount has now been closed, and the implied
return over our holding period has been very attractive.
Amazon had been rumoured to have been kicking the tires on Whole Foods last
fall, but decided not to move forward on a bid, perhaps because they felt
the company wanted to remain independent. Since then, operating results
have not materially improved, and activist shareholders arrived in the
picture who were openly supportive of a takeout to maximize shareholder
value. Hence, a window opened for Amazon to be opportunistic when the Whole
Foods management team set up a meeting to discuss strategic options. (A
town hall meeting held by Whole Foods explaining how the deal came about it
is worth a read
This is the largest acquisition that Amazon has made in its history, more
than 11 times larger than its next largest acquisition ($13.7B for Whole
Foods vs. $1.2B for Zappos).
Amazon has a long history of experimenting and taking calculated risks. It
first began beta testing a grocery delivery service in the U.S. in 2007
(AmazonFresh). This resulted in a lot of important learnings, and clearly
this decade-long experience has given them enough confidence to make a
major bet on the huge grocery sector – hence the Whole Foods announcement.
The deal makes strategic sense because Whole Foods’ urban footprint has a
very high degree of overlap with the AmazonFresh/Prime Now markets. The
deal’s online-offline synergies and benefits to consumers also make this a
sensible move for Amazon.
Not surprisingly, the stocks of most other companies in the grocery sector
have been under pressure as investors come to the grips with the new
reality that Amazon is about to become a much larger threat to the entire
grocery industry value chain.
This transaction is both a cautionary tale about the reliance on old models
and a lesson about the emerging winner-takes-all-or-most digital economy.
Better to own the disrupter than the disrupted (assuming the price of
the disrupter is sensible).
Felix’s Commentary for Q1 2017 (Part 2), which delves further into this idea.
Felix Narhi, CFA, is Chief Investment Officer and Portfolio Manager at PenderFund Capital Management.
He works alongside David Barr, Pender’s President, in setting the
direction of Pender’s overall investment strategy. This article first
appeared in the
Pender Blog. Used with permission.
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