Austin, Texas-based natural and organic food retailer Whole Foods Markets has entered into a definitive agreement to acquire smaller rival Wild Oats Markets in a deal which, Whole Foods said, will allow it to better compete with traditional grocery chains that are increasingly cutting into the organic niche.

Whole Foods has issued a cash tender offer of US$18.50 per outstanding common share, totalling approximately $565m. This represents an 18% premium on Wild Oats' stock value prior to the announcement. Whole Foods will also assume net debt totalling around $106m.

The news came as Whole Foods posted a 7.7% drop in quarterly earnings.

While organic and natural foods are gaining in popularity, competition in this area has hit Whole Foods' growth as Wal-Mart and traditional grocers increase their organic offering. Comparable store sales rose at Whole Foods rose 7% percent in the quarter compared to a 13% rise a year earlier.

"The growth opportunity in this category has led to increased competition from many players, most of whom are not dedicated natural and organic foods supermarkets, but are considerably larger than we are," Whole Foods chief executive John Mackey said in a statement, adding that the deal's timing "could not have been better."

Whole Foods said the addition of Wild Oats' 110 stores to its 190-store base will give it access to new markets and increase its presence in the Pacific Northwest, Rocky Mountain region and Florida.

"As the natural and organic foods industry continues to receive attention from larger conventional players, the timing for our two companies to join forces could not be better," said Gregory Mays, chairman and CEO of Wild Oats Markets.

Whole Foods Market said that it will evaluate each store and banner to see how it fits into the company's overall brand and real estate strategy. While Wild Oats has rationalised its store base over the last several years some additional store closures are expected as well as the relocation of some stores that overlap with stores operated by Whole Foods Market. Whole Foods Market added that it expects to make significant investments in remodelling stores before eventually rebranding them as Whole Foods Market stores.