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What You Need To Know About Amazon’s Largest Deal To Date

Co-written by Jim Elder, Director, Risk Services, S&P Global Market Intelligence

By many standards, Amazon.com, Inc.’s (NasdaqGS:AMZN) announcement that it had entered into an agreement to acquire Whole Foods Market, Inc. (NasdaqGS:WFM) was extraordinary. Besides ranking as Amazon’s largest ever acquisition at $14.6 billion, the amount represents approximately 2.6x the aggregate disclosed value of $5.59 billion for all of Amazon.com’s previous acquisitions.

Prior to Whole Foods, the company’s top acquisition, according to S&P Global Market Intelligence data, was a $894.6 million purchase of online shoe retailer Zappos.com, Inc. from Venture Frogs, LLC, Sequoia Capital, Tenaya Capital, Millennium, and other shareholders for approximately $890 million in stock on July 22, 2009.

Amazon.com’s only other M&A deal this year was an agreement to acquire Middle East and North African e-commerce platform Souq.com FZ-LLC for approximately $650 million on March 28, 2017.

Leading Acquisitions Announced by Amazon.Com

Leading Acquisitions Announced by Amazon.comSource: S&P Global Market Intelligence, June 21, 2017

Aside from the value of the proposed deal, another significant aspect is that the transaction ranks as the second-largest U.S. M&A transaction ever announced in the grocery market and the largest since SUPERVALU Inc. entered into a definitive agreement to acquire Albertson’s Inc. in a deal valued at $16.3 billion (inclusive of assumed liabilities) in January 23, 2006.

Year-to-date there have been 26 announced M&A deals involving targets in the U.S. grocery market with a total disclosed value of $14.6 billion. That dollar amount already exceeds the annual dollar amount of U.S. grocery store M&A transactions in each of the years between 2007 to 2015. Furthermore, if the current year ended at this time, it would stand as the third-best year on record for U.S. grocery store M&A value, with only 2006’s total of $16.7 billion and 1998’s total of $18.5 billion being greater.

Amazon’s largest ever acquisition at $14.6 billion

Additionally, in terms of valuation, based upon Whole Foods Market, Inc.’s EBITDA (earnings before interest, tax, depreciation and amortization) of $1.33 billion for the period of the last twelve months, the recent deal reveals a multiple of TEV (Total Enterprise Value)/EBITDA of nearly 11x. That stands as the fifth highest valuation among U.S. grocery stores M&A deals above $1 billion in disclosed value.

Leading U.S. Grocery Stores Industry M&A Transactions

Leading U.S. Grocery Stores Industry M&A Transactions

Source: S&P Global Market Intelligence, June 21, 2017

U.S. Grocery Stores M&A Deals -- Greater than $1 billion and Rank by Target’s TEV/EBITDA Multiple

U.S. Grocery Stores M&A Deals

Source: S&P Global Market Intelligence, June 21, 2017

This proposed acquisition has also triggered a reaction in the market-perceived credit quality in the industry.  The median one-year probability of default (PD) for the food retail industry within the United States, as measured by S&P Global Market Intelligence’s PD Model Market Signals, displayed a notable increase in risk immediately after the acquisition was announced and then climbed higher in the following week.

One Year Probability of Default

The median one-year PD sat at 3.73% on June 15, and deteriorated by 14% to 4.26% on June 16, finishing at 4.85% on June 23, a 30% rise overall. This model, which is influenced by the company’s stock performance as well as financial and systemic risk variables, demonstrates that the market is perhaps cautious about the prospects of the food retail industry in light of Amazon’s increasing footprint in the food industry.  During this same period, the PD for Whole Foods saw an improvement of 63%, falling to .021% from .057% pre-announcement.

However, this is not necessarily a “done deal”. As of June 27, 2017 WFM’s stock is trading above the $42.00 per share that Amazon.com offered, a competing bid may emerge. Prior to the recent Amazon.com announcement, a number of potential suitors - from private equity buyers to strategic buyers such as such grocers The Kroger Co. or Albertson Companies, Inc. – were named as possible acquirers of Whole Foods Market. While historically competing or unsolicited M&A bids are often unsuccessful, the fact that the target’s current price stands above the buyer’s offer price suggests that the market may be looking for a rival bid for the company. We will be closely watching whether such a development occurs.

Are you spending a lot of time verifying transaction valuations? Learn more about our reliable transaction data.

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