On June 16, wide-moat Amazon announced it plans to acquire narrow-moat Whole Foods Market in a $13.7 billion all-cash deal. This equates to $42 per share or around a 25% premium to our fair value estimate and the prior market close.
Whole Foods has been under pressure from activist investor Jana Partners to reignite its operations and unlock value. From our vantage point, we think a sale offered the best investor outcome given the intense competitive pressures facing the grocery business, and Amazon is paying toward the top of the range of what we figured the business could fetch.
This deal could also be advantageous as Whole Foods works to right its ship and drive efficiencies across its operations, given that Amazon has developed a very powerful and disruptive brand that has become synonymous with competitive pricing, expedited shipping, and customer service.
From Amazon's point of view, the deal gives the firm the opportunity to gain a larger brick-and-mortar presence, as well as access to higher-quality fresh food fare.
We intend to raise our $33.50 fair value estimate for Whole Foods to the deal price as we don't foresee another bid surfacing before the expected close in the second half of 2017. We expect to see little change to our $1,050 fair value estimate for Amazon, given the small relative size of the deal.