Grocery rival bags Wild Oats

Some stores likely to close once $671 million deal final

Janet Forgrieve, Rocky Mountain News

Published February 22, 2007 at midnight

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Whole Foods Markets Inc. ended years of speculation Wednesday when it announced plans to buy its biggest rival, Boulder- based Wild Oats Markets Inc., in a deal valued at $671 million.

Homegrown chain Wild Oats has posted a loss in two of the past five years. Its sales have increased 26 percent over the period to $1.2 billion, while Whole Foods has doubled profit and sales.

"Whole Foods had won the size game and was able to call the shots," said Matt Patsky, portfolio manager at Boston- based Winslow Management Co., which oversees $350 million, including shares in Austin, Texas-based Whole Foods.

The plans call for a period of integration, during which the company will decide which stores to close in duplicate markets. At the end, the Wild Oats name will be gone and all stores will be rebranded as Whole Foods.

Once the deal closes, Wild Oats' new headquarters at Boulder's Twenty Ninth Street shopping center will become a regional office, said Whole Foods spokeswoman Kate Lowery.

Whether the new flagship store in the same center will actually open is up in the air, she said. Wild Oats held a job fair last week to fill 250 job openings at the store.

Until a sale is final, both companies must continue to operate independently, so Wild Oats will proceed on the Boulder store, though construction delays have likely pushed past a tentative March opening, said Wild Oats interim CEO Gregory Mays.

The boards of both companies unanimously approved the deal, which includes a cash tender offer of $18.50 per share, or $565 million, plus the assumption of $106 million of Wild Oats debt.

The deals must be approved by shareholders. If that happens on schedule, the sale could close in six or seven weeks, Mays said.

Lowery said it was too soon to talk about how many jobs might be cut after the deal closes, but Whole Foods expects to realize synergies and cost savings over time from combining systems and accessing greater purchasing power. The Texas chain employs about 42,000, while Wild Oats has 8,233 workers, about 1,100 of them in Colorado.

Whole Foods expects the company to hit $12 billion in sales by 2010, co-founder and CEO John Mackey said in a news release.

Wild Oats operates 110 stores in the United States and Canada, including Henry's Markets in California and Capers in Canada.

Whole Foods operates 192 stores in 11 markets in North America and the United Kingdom, and had $5.6 billion in revenue last year. On Wednesday, it reported a drop in first-quarter income, its first in five quarters.

Both chains face pressure from conventional grocers, including Safeway and Wal-Mart, which have beefed up offerings of organic and natural products.

"I think for the industry it's a positive development," said Barney Feinblum, a former member of the Wild Oats board and a current Whole Foods shareholder. "I think Whole Foods will exploit and grow the market. The competition in the future will come from the conventionals."

Feinblum is chairman of Boulder-based Organic Vintners and a principal in Greenmont Capital Partners, a private equity firm that invests in companies in the natural, organic and sustainable lifestyles sector.

Feinblum said he expects changes in the stores will be gradual, and it's likely that Whole Foods will incorporate some Wild Oats features into the brand.

It's too early to talk about all that will change, said Whole Foods' Lowery.

"But if you look at our past acquisitions, we really celebrated a lot of the things about those stores," she said. "A lot of that is still alive today. "

Both companies grew through a combination of acquiring smaller local and regional chains while also opening their own stores, although Wild Oats has faced criticism from analysts in recent years for not expanding faster and for taking too long to fully integrate acquisitions.

For several years during former CEO Perry Odak's tenure, management had to focus on renovating or relocating older, smaller stores to the detriment of building new ones. But Wild Oats recently broke into new markets, including Tampa and Naples, Fla.

Whole Foods said it plans to spend considerable amounts in renovating and expanding Wild Oats stores before changing the names. It's likely that some stores could close in markets such as Denver and Boulder where both retailers have a significant presence.

The acquisition will give Whole Foods immediate access to new markets, including Utah and Northern California, and a leg up in markets such as Vancouver, British Columbia, and Florida, where Wild Oats already has a presence.

A smaller but growing local player, Lakewood-based Vitamin Cottage, is watching the deal.

"We've been mulling the issue over this afternoon," said Kemper Isely, president of the family owned, 25-store chain.

It's not likely the deal will have a huge impact on the Lakewood- based natural market chain, he said, since both big players already operate in the same markets as Vitamin Cottage.

There may be anxious moments for other grocers, though.

"They'll be able to leverage Whole Foods' buying power, so from that standpoint there's some concern," Isely said.

Anatomy of the deal

• Financial: Whole Foods Market is buying Wild Oats' outstanding common stock for about $565 million, or 18.50 a share in cash. It also will assume Wild Oats' existing net debt of about $106 million.

• Operations: All of Whole Foods' 11 operating regions will gain stores, and three of its smallest regions-the Rocky Mountains, Pacific Northwest and Florida-will gain stores, distribution facilities and other "critical mass" operations.

Whole Foods also gains entry into several new markets, includingNorthern California; Tennessee; Utah; Little Rock, Ark.; Cincinnati;and Tulsa, Okla.

• Consolidations: The company says it expects to close some under performing Wild Oats stores and says additional store closures and relocations are expected in areas where the twocompanies' operations overlap.

Whole Foods says it will remodel some Wild Oats stores beforere-branding them as Whole Foods Market stores.

Opportunity seized

Whole Foods executives said they approached Wild Oats because they sensed a "strategic gap" after the smaller company lost its chief executive and chief financial officer.

"I called up their interim CEO," said Whole Foods founder and CEO John Mackey. "I thought, gosh, maybe this would be a good time to approach Wild Oats."

Mackey said Wild Oats Chairman and interim CEO Gregory Mays asked, "What's your price going to be?" and the deal came together in a couple of weeks.

forgrievej@RockyMountainNews.com or 303-954-5191.

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