Barclay’s Upgrades Whole Foods, Says Food Retailers Have ‘Too Much to Lose’ By Not Offering a Competing Bid

Karen Short at Barclay’s took WFM to an overweight today, assigning a $48 price target, thinking that Whole Foods is going to receive a competing offer from WMT, TGT or KR. She blames KR for not acting sooner on Whole Foods as the reason why Amazon jumped into the mix, acquiring the organic food giant. Additionally, she thinks that one of the big three grocers must find a way to steal Whole Foods away from Amazon, or at least make it much more expensive for them to acquire.

In the case of WMT, 50% of their revenues derive from food sales, leaving them exposed in a big way to the Amazon threat.

Source: CNBC

“We assigned a 40 percent probability to this scenario. Our downside scenario is $42, which is equal to Amazon’s current bid…We believe there is little regulatory risk that would prevent an Amazon/Whole Foods deal from being consummated. We assign a 60% probability to this scenario,” the Barclays analysts wrote.

The Barclays analysts noted that very few entities could outbid Amazon, but “many will do anything to either make this acquisition more costly for [Amazon] or prevent the asset from landing in [Amazon’s] lap–because remember –retail strategic bidders would eliminate overhead at [Whole Foods] in the event of an acquisition, Amazon intends to let Whole Foods operate as is,” they wrote. They said a strategic buyer could see synergies of up to $600 million.

Oppenheimer agrees with Barclay’s and the analyst was interviewed today on CNBC to discuss.

The vanguard of the Amazon threat lies in the already razor thin margins in the food space. Whole Foods enjoys the highest EBIT margins in the industry at 8-9%, compared to Kroger’s 5%. It’s very likely that once assimilated into the Amazon matrix, Bezos will slash prices, perhaps down to 2-3% margins, in order to render Kroger entirely helpless to his deflationary vortex — sending them towards an expeditious bankruptcy.