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August 21, 2007

Whole Foods pursuit of rival holds attention to the last

It is six months since Whole Foods Market first launched its bid to acquire rival natural and organic chain Wild Oats Markets. A court ruling last week seemed to have taken Whole Foods a step closer to closing the deal but this long-running saga may have a further twist or two yet. Ben Cooper looks at why the case has attracted so much attention.

It is six months since Whole Foods Market first launched its bid to acquire rival natural and organic chain Wild Oats Markets. A court ruling last week seemed to have taken Whole Foods a step closer to closing the deal but this long-running saga may have a further twist or two yet. Ben Cooper looks at why the case has attracted so much attention.



Some takeover battles are fought in the boardroom but others are won or lost in the courtroom. And, from early on, this appears to have been the fate of the US$565m acquisition of natural foods retailer Wild Oats Markets by its larger competitor Whole Foods Market. 


The latest – and possibly definitive – episode in this protracted saga was seen last week when the US District Court for the District of Columbia denied the Federal Trade Commission’s (FTC) request for a preliminary injunction to block the deal on antitrust grounds.
 
However, this may not be the end of the matter. The FTC is seeking leave to appeal the decision, and will find out probably by the end of this week whether an appeal will be heard. 


The case has been captivating for a number of reasons. The merits of the FTC’s suit effectively rest upon the degree to which organic and natural foods have entered the mainstream, a significant trend across many developed markets. It has also cast an interesting light on how the FTC operates both as regulator and advocate. Meanwhile, the constant and colourful presence of Whole Foods’ charismatic founder and chairman John Mackey, and some of his somewhat unconventional business techniques, have guaranteed sustained media interest.
 
The FTC’s attempt to block the merger comes down to competitive definitions in the marketplace. In brief, the FTC contends that Whole Foods’ merger with Wild Oats would result in a reduction in competition in the whole and natural foods sector, hurting consumers.
 
Whole Foods, however, has stressed that as organic and natural foods have become more popular, major retailers, such as Wal-Mart, Safeway and Kroger, have expanded their organic ranges. Whole Foods currently has 197 stores, and Wild Oats has 109. Wal-Mart has 1,900 superstores alone, before its other warehouse, discount and neighbourhood stores are taken into consideration.
 
Even so, the FTC believes that the merged entity would effectively corner the market for premium and organic food, and while the major chains offer natural and organic food, only a large specialist like Wild Oats can provide the competition needed to keep prices in check.
 
And yet, Whole Foods’ self-characterisation as a brave independent doing battle with the mighty grocery chains does not sit easily with some of the other information circulating about its plans for Wild Oats after the deal is completed. Judging from documents originating from Whole Foods itself which, along with expert testimony from Kevin Murphy, an economics professor at the University of Chicago, made up a key part of the FTC’s case, Whole Foods could just as easily be cast in the role of hard-nosed market leader that targeted its most dangerous competitor and moved in for the kill.
 
In its “Operation Goldmine” plan, Whole Foods details plans to close some 30 Wild Oats stores immediately after the deal closes, and also forecasts that revenues at Whole Foods outlets near to where Wild Oats had been trading would almost double.
 
Information contained within FTC filings which were accidentally published during the case – another twist lending the case further notoriety – also suggested that Whole Foods had put pressure on suppliers who were also dealing with Wal-Mart. So while Whole Foods might be smaller than some of the big food retail giants, any notion that it is somehow more “cuddly” – possibly stemming from the healthy and environmentally-friendly nature of its products – should be treated with caution.
 
Nevertheless, Judge Paul L. Friedman took the view that the FTC’s case was not made. Even here, the case has taken a somewhat curious twist, in that the judge’s summing-up was not made public. This could either be because of the strong likelihood of an appeal or, as one legal expert suggested, because the judge had delayed its publication in order to remove any confidential information – more than a little ironic given the earlier accidental disclosure of similar details.
 
The case has also given an interesting insight into the workings of the FTC. Observers of this case will have seen a very clear demonstration that the FTC functions not just as a regulator but as an active advocate, pursuing through legal channels a course of action that it believes is right.
 
Andrew Klevorn, a partner with the Chicago law firm Eimer Stahl Klevorn & Solberg and an expert in antitrust cases, believes this is entirely in keeping with its statutory role and should not be viewed as surprising. “They are advocates there is no doubt about it and that is the role they are assigned and it is the judge that is to be the objective decider,” Klevorn tells just-food.
 
Adding a certain spice to proceedings has been the presence of Whole Foods boss Mackey. In the midst of the affair, Mackey was revealed as an anonymous blogger who had for a number of years been posting remarks on Internet sites, talking up his own company and casting aspersions about Wild Oats. Bear Stearns analyst Robert Summer described the postings as a “distraction”, though he added that at worst it could weaken Mackey’s position as CEO.
 
The blunder that led to information in an FTC court filing, intended only to be seen by the judge, being disclosed to the media, was also seen as having no direct relevance to the merits of the argument. However, that such an accident should occur seems entirely in keeping with an incident-strewn case that has never failed to maintain public attention.
 
And it may continue to do so. Even if the FTC fails to gain leave to appeal, the regulator could pursue its own administrative proceeding without court backing. The FTC has not pursued this course of action very often in recent times but the last time it did so was during the not dissimilar case of the $4bn acquisition of Office Depot by Staples Inc. in 1997, which incidentally was the last time the FTC blocked a merger on antitrust grounds.


The FTC is thought to be unlikely to break with recent convention and opt to pursue its case further in the event of not being granted an appeal or failing to win one if it were granted, but it is not beyond the realms of possibility. In this case, it would be wise to rule nothing out.
 
Moreover, rather ironically, if the FTC’s own proceedings were to conclude that there are antitrust grounds for blocking the deal, Whole Foods would have the right to challenge that decision in district court – which would effectively land the case back in the same courtroom where it has been stalled for the last three months. The wheels of justice turn slowly, and sometimes can even shift into reverse it would appear.

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