Wild Oats
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Whole Foods' plan to take over Wild Oats, including this store in Pasadena, Calif., is being challenged by federal regulators.
Alison
By Allison Linn Senior writer
msnbc.com
updated 7/18/2007 11:37:54 AM ET 2007-07-18T15:37:54
ANALYSIS

When word got out that the Federal Trade Commission would try to block Whole Foods Market’s proposed takeover of rival grocer Wild Oats Markets, even some who regularly follow the regulators admitted to being a little perplexed.

Then the details emerged. In subsequent filings, the FTC has quoted Whole Foods’ Chief Executive John Mackey as telling his board of directors that taking over the rival would eliminate price competition in some markets and prevent another large grocer from building a formidable competitor.

Those revelations, plus the disclosure that Mackey regularly made anonymous Internet postings that at times bashed Wild Oats, leave the proposed $565 million acquisition on shaky ground. The hubbub is renewing speculation about what will happen to the two high-end, natural and organic grocers if the government blocks their proposed marriage.

Late Tuesday, Whole Foods' board of directors said it would conduct an independent investigation into Mackey's online postings, and the company confirmed that the Securities and Exchange Commission has launched an inquiry into the postings.

In a statement, Mackey said, "I sincerely apologize to all Whole Foods Market stakeholders for my error in judgment in anonymously participating on online financial message boards."

Stephen Calkins, formerly general counsel for the FTC and now a professor at Wayne State University law school in school in Detroit, said the online postings, while potentially damaging to the CEO's credibility, do not threaten the proposed takeover as much as the comments he made to his board of directors.

“It’s hard to imagine a merger case where a company communication is more harmful than has occurred here,” said Calkins said. “When a CEO communicates to his board, setting out an anticompetitive rationale for a merger, that’s about as good as it gets for a prosecutor.”

Still, Calkins said the case is by no means a slam-dunk for the FTC. For starters, he said, the government hasn’t won a big merger case in a while, and recent case law would seem to make the attempt more difficult.

In addition, despite Mackey’s comments, Calkins believes that the FTC hasn’t yet provided enough data on the two stores’ pricing strategies to show clearly how a merger might hurt consumers at the checkout stand.

“Even though Mr. Mackey has said very unhelpful things, Whole Foods can still win this case,” Calkins said.

In court documents, the FTC has alleged that when one of the companies enters a market, the other responds by lowering prices, remodeling the store or making other changes. It argues that although there are plenty of other stores offering organic and natural foods, the two companies consider each other to be the greatest competitive threat.

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Although the outcome is far from clear, some who follow the companies are bracing for the possibility that takeover will fall through. In a research note released last week, Bear Stearns analyst Robert Summers said that, given the most recent revelations, “(W)e believe the FTC case against the merger appears solid and are now leaning more toward the FTC prevailing in its injunction.”

That, he added, would take away a “potential positive catalyst” for Whole Foods’ shares.

Wall Street is eager for Whole Foods to find something that will spur growth. The proposed million deal, announced in February, came just a few months after Whole Foods conceded that it didn’t expect to be able to sustain the incredible growth it had experienced over the past few years.

Shares of Whole Foods, which were trading around $65 last fall, fell sharply after that disclosure and have been unable to make up much ground. The shares currently trade around $40.

Howard Davidowitz, chairman of the retail consulting and investment banking firm Davidowitz & Associates, thinks Whole Foods can continue to grow even without the merger. But, he cautions, “I think some steam will be taken out of the possibilities.”

Davidowitz still believes Whole Foods represents the “gold standard” for organic and natural foods grocers, but he sees giants like Safeway increasingly encroaching on the turf. Even megaretailer Wal-Mart has expanded its organic offerings to capitalize on the trend toward more natural food.

Mackey himself, whose identity has been closely tied to the company, could prove a liability if the merger fails, analysts say.

Mackey is the co-founder and chairman of the chain and is credited for essentially inventing a niche market in high-end natural grocery shopping, Davidowitz said. But, he said, the CEO’s comments, as disclosed in the FTC documents, have “tarnished Whole Foods and put the future of Mackey possibly in doubt.”

Whole Foods did not return several calls and e-mails seeking comment. The company has in the past vowed to fight the FTC.

There is also speculation that another mainstream grocery company could swoop in and buy  Wild Oats if the current deal falls through, providing a new competitive threat to Whole Foods. That is one of the concerns Mackey himself has fretted about, according to the FTC documents.

Wild Oats spokeswoman Sonja Tuitele said the company wasn’t looking to sell when Whole Foods approached its management with the deal. She said Wild Oats would still like the Whole Foods acquisition to go ahead, but if it falls through interim Chief Executive Gregory Mays plans to continue running the company on its own.

“It’s not like if this doesn’t go through he’s going to run out and try to find another buyer,” Tuitele said.

Still, it would leave the company in flux. Mays, who also serves as the company’s chairman, took on interim CEO duties in October, after the company could not come to an employment agreement with its previous CEO, Perry Odak. Tuitele said the company has continued with some of its revitalization plans since the merger was announced, and has been pleased with its progress. But other plans, particularly for growth, are on hold pending the outcome.

Meanwhile, shareholders have been on a bit of a wild ride. Shares in Wild Oats rose from $15 per share before the acquisition was announced to hover just below the $18.50 per share asking price soon after. But they have fallen again more recently and are currently trading at around $16.50.

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