Stage II: Financials
In Stage II for the chronology of the Amazon Whole Foods Deal, parties evaluate the financial landscape and implications of the deal being pursued. Amazon as the buyer has to make sure that what the company ends up offering as a price per share makes sense with a future value perspective.
With the intention to frame this stage, Amazon will look at the past, the present and the future in order to see what opportunities and/or difficulties might arise in the case of the Whole Foods acquisition.
The Past – Whole Foods Markets Stock (WFM) @ $65 per share
As recent as 2013, the WFM stock hit its all-time high of $65.24 per share. This all-time high can be attributed in great part to good operations and great revenue growth from its IPO, among other things. This meant that the value of Whole Foods Markets back in 2013 was nearly $20 billion dollars. Fast forward to Amazon offering $42/per share, this would be valuing the company around $13.4 billion dollars (with 319 million outstanding shares). Needless to say, there is room for opportunity.
In September 2016, Whole Foods Markets posted revenue of $15.7 billion dollars and $857 million in operating income. Amazon would be purchasing Whole Foods Markets at 0.85 times price over sales, and 15.6 times price over its operating income. In several years, this is going to look like an incredible steal. (Galileo Russell – Seeking Alpha).
The Present – Whole Foods Total Revenue and Growth
In the past couple of years, active investors such as Jana Partners and money manager Neuberger Berman have been pushing Whole Foods Markets to sell itself or perhaps merge with another grocer. These active investors are attributing the slow growth of the past couple of years in revenue on poor operational performance on behalf of Whole Foods (Sarah Whitten – CNBC).
It is not news that Whole Foods has been struggling with growing revenue year over year, but this is an issue that has been attacking the brick and mortars retailers everywhere. This is where Amazon opportunity comes in as leaders in supply-chain retail management operations. Add to that, [Amazon] being guru’s in customer experience will most likely entail understanding Whole Foods customers in a way that Whole Foods has never been able to do before. The financial value that comes from understanding the current customer base at a more detailed level can be valued in potentially millions of dollars in sales that are currently not being made.
The Future – Synergies
The estimated future synergies that can come from this deal would be difficult to calculate, but at the moment we can see cost reductions in supply chain and other efficiencies to be in the ballpark of millions of dollars. This at the same time will help soften the low marginal costs of brick and mortar retail and will evolve into the future of food retailing.
There is an aspect of the deal that has caught some attention: DATA. According to data scientists, Amazon might be looking to integrate their customer data, whole foods customer data and Amazon’s Echo customer data to design shopping list that caters to the needs of the customer. The ability for Amazon and Whole Foods to know what you need and when you need it will be the next step in re-inventing the food retail model and bringing it to the forefront of technology and personalized customer experience.
It will be difficult to estimate how much can synergies like this can mean in terms of revenue because changing the customer’s shopping experience is not an easy thing to do. That being said, these changes are happening, whether in five or ten years, but nevertheless, it’s happening. As we are sure, Amazon will be there waiting to cash out on what could be considered a great acquisition of incredible value at what would be then, a “steal” as a price.
The biggest synergy this deal has as financial value for both companies is the expertise that each other lacks, which each other can help by adding value (experience) to it. Amazon has been testing models to establish what can be the future of brick and mortar stores. Now, Amazon is not a brick and mortar model. They are a technology company. On the other hand, Whole Foods has the experience of brick and mortar, but they lack technical expertise. It was not until mid-2016 that Whole Foods made the decision of getting rid of old legacy systems and implementing a new core cloud system focusing on data. Amazon has a bigger risk in this purchase but they are buying expertise that Whole Foods possess. The beauty of the financial aspect of this deal is that the financial value goes both ways.