Kroger Co (KR) Isn’t Coming to Save Whole Foods Market, Inc. (WFM) Stock

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Whole Foods Market, Inc. (NYSE:WFM) and Twitter Inc(NYSE:TWTR) are playing M&A tag, it seems. On Thursday, WFM stock got a 5% bump amid reports that it might have a buyer in Kroger Co (NYSE:KR) while it turns out that nobody wants TWTR after all.

The news broke courtesy of Mike Bergen, who tweeted:

But as one astute Tweeter pointed out, why would Kroger buy Whole Foods when it can beat them?

Why Would Kroger Want WFM?

Shares of Whole Foods Market are up nearly 5% on the speculation, but it’s still barely off of its 52-week lows, where nary a buyer dares go near. That’s because it’s easy to keep making new lows from here, and WFM stock has been on a wild ride over the past five years.

A lot of that has to do with increased competition in the healthy foods space.

Whole Foods was once king of the hill, with hardly a worthy competitor in sight. Those days are long gone, and Kroger has been eating WFM’s lunch for some time. That wild ride of Whole Foods has cost shareholders 11% for the past five years, while KR stock is up 165% in the same timeframe.

It turns out there’s not a high barrier to enter into the organic market, and people don’t actually care where they get their organics from as long as it’s fresh and cheap. The Whole Foods brand is not worthless, but is worth less in that regard.

Of course, Whole Foods hasn’t helped itself, either.

It accused of price gouging in 2015, which contributed to its second-quarter profit decline of 22%. Then there’s the slew of “serious violations” at WFM’s Everett, Massachusetts, food-prep facilities, where WFM was faulted for egregious employee violations ranging from failing to sanitize prep surfaces to spraying greens with an ammonia-based sanitizer.

Bottom Line on WFM and KR

I just can’t see Kroger paying $40 per share — a 43% premium to WFM’s closing price of $27.96 Wednesday.

Earlier in the year, the rumor mill churned organic butter out of news that Kroger would buy The Fresh Market, sending TFM stock up about 23%. That turned out to be false. The Fresh Market instead was bought out by Apollo Global Management LLC (NYSE:APO) at a premium of 24%.

It’s not like KR is adverse to buyouts. Kroger snatched up Harris Teeter for $2.5 billion in 2014, followed by Vitacost.com for $280 million. Then, in 2015, it bought little-known organic grocer Roundy’s for $800 million in 2015. Roundy’s was neck-deep in debt and hasn’t increased comps in years, but Kroger needed more locations in Chicago and Wisconsin to remain competitive and ultimately take on Wal-Mart Stores, Inc. (NYSE:WMT). The grocer ultimately paid a 60% premium for the deal.

Kroger paid cash for all those moves, and it has racked up a significant amount of debt. Kroger currently has $320 million in cash and short-term investments on hand. And it has $9.6 billion in IOUs.

The one thing that Whole Foods could possibly offer Kroger is more locations. That’s because store count increases the moat of an organic grocer, as people tend to shop in stores that are near them.

But with 2,700 locations already, is adding another 452 stores globally worth valuing beleaguered WFM stock at $40 a share and taking on even more debt?

I wouldn’t bet my kale and quinoa salad on it. But with Kroger stock up 1.2% today, it looks like the market would welcome a deal with open arms.

As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/10/whole-foods-market-inc-wfm-stock-kroger-co-kr/.

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