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Whole Foods: Amazonís big move into the grocery value chain
12/13/2017 7:21:44 PM
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By Fund Library News Wire  | Thursday, August 03, 2017


 



By Felix Narhi, CIO & Portfolio Manager, Penderfund Capital Management

Whole Foods (NASDAQ: WFM) is the second announced takeout of a top five Pender Value Fund holding last quarter (following the Panera deal – see our previous post). WFM is also a holding in the Pender US All Cap Equity and the Pender Strategic Growth & Income Funds. But unlike PNRA, we are pleased about this announcement.

WFM is a great company, but in our view, as an independent entity, it was no longer a compounder 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 Amazon.

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 here.)

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). See 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.

Notes and Disclaimer

© Copyright 2017 by PenderFund Capital Management Ltd. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in net asset value and assume reinvestment of all distributions and are net of all management and administrative fees, but do not take into account sales, redemption or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication is intended for information purposes only and does not constitute an offer to buy or sell our products or services nor is it intended as investment and/or financial advice on any subject matter and is provided for your information only. Every effort has been made to ensure the accuracy of its contents. Certain of the statements made may contain forward-looking statements, which involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

 
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