Wild Oats Markets Inc. may be primed to merge, but industry insiders said a stock sale that could raise as much as $64 million for the natural grocer means a pairing is not imminent.
In mid-June, the Boulder, Colo.-based retailer filed a registration with the U.S. Securities and Exchange Commission to sell up to 4.45 million shares in a private offering led by J.P. Morgan Securities Inc. In the filing, Wild Oats said it expected shares to sell for an average of $14.28 each. In transactions known as Private Investment in a Public Equity, the shares will be offered only to large and institutional investors as the company attempts to raise the $30 million to $50 million it needs to support its aggressive growth initiatives, spokeswoman Sonja Tuitele said.
News of the stock sale quickly slowed merger rumors that have swirled since last year when Perry Odak, the man who engineered the $326 million sale of Ben & Jerry's Homemade Inc. to Unilever N.V., became chief executive of Wild Oats.
"What this financing says is that in the near term these executives have elected to execute their growth strategy," said Edward Aaron, an analyst with RBC Capital Markets in Denver.
Still, Aaron said he expects Wild Oats will eventually be acquired. Other market watchers concur, suggesting that big mainstream grocers may be eyeing Wild Oats as an important strategic asset in the battle against the biggest retailer of all, Wal-Mart Stores Inc.
RBC in May issued research suggesting that long delays in securing much needed capital, and the fact the grocer has not yet renewed a distributor agreement with Dayville, Conn.-based United Natural Foods Inc. that expires in August, indicated turnaround artist Odak was close to selling the company. RBC is a market maker for Wild Oats.
Now it would seem the company was waiting to announce earnings before looking to the market for more capital.
In May, Wild Oats reported earnings of $668,000 on sales of $233 million—its first profit in five quarters. Same-store sales were up 7 percent for the period. Investors rewarded the performance by pushing the stock to a 52-week high of $16.43.
Since then, the stock has traded in the $14.50 range, but it will take $20 per share to make a merger worth Odak's while. His employment agreement stipulates that if shares trade at more than $30 or if the company is sold at more than $20 per share, Wild Oats will forgive the $9.2 million it loaned him to purchase a 5 percent stake in the company.
Wild Oats will use proceeds of the stock sale primarily to fund new stores and to remodel others.
So even if, as has been rumored, mainstream giants Albertson's, Kroger, Royal Ahold and Safeway are anxious to pair with Wild Oats, the natural grocer now will have enough cash to stand alone, at least for a while.
Wild Oats plans to open three stores in late 2002 and early 2003 and has slowly rolled out its Fresh Look marketing program, which includes in-store price cuts, better merchandising, private-label promotions and more aggressive advertising. In April, the company unveiled a new store format in Long Beach, Calif., which will serve as the prototype for new stores. The company plans to open 10 stores in 2003, 20 in 2004 and 25 in 2005, "pending this capital-raising plan," Tuitele said.
All this should help improve Wild Oats' financial performance and, perhaps, groom it for a takeover.
Boise, Idaho-based Albertson's and the Dutch grocery conglomerate Royal Ahold are the most likely suitors, said Kevin Coupe of Morningnewsbeat.com, a news, information and opinion Web site for food retailers and manufacturers.
Albertson's Chief Executive Larry Johnston is on record saying he intends to boost the No. 2 U.S. grocery retailer to the No. 1 position worldwide. Coupe said a Wild Oats-Albertson's deal could work because it gives Albertson's instant access to the $34 billion natural products market.
But a deal with Royal Ahold would make even more sense. Ahold has established a powerful East Coast network, gobbling up the Stop & Shop, Giant, Tops, BI-LO and Bruno's brands. Acquiring Wild Oats would give the Dutch chain a national network and a way to further exploit Peapod, the online shopping site it acquired in 2000.
"Ahold is a very progressive, very smart company," Coupe said. "Wild Oats would give them a national infrastructure that they don't have right now. In the 21st century, food retailers have to be where people want them, with the products they want. Peapod is a natural marketing extension.
"It's a real interesting chess game right now," Coupe said. "But don't forget the subtext to this is Wal-Mart."
Bob Scowcroft, executive director of the Organic Farming Research Foundation in Santa Cruz, Calif., estimates if Wal-Mart is not already No. 1 in gross organic sales, it soon will be.
At its annual meeting in June, Wal-Mart announced plans to open 15 to 20 Neighborhood Market stand-alone grocery stores and 180 to 185 Supercenters, which include groceries. The retail behemoth already buys big from such organic producers as Earthbound Farm, White Wave, J.R. Simplot Co. and Grimmway Farms. "Those start to add up," Scowcroft said.
"Wal-Mart is just reflecting society as a whole," he said. "Organic is growing, everyone's got to carry it and it can be packaged to meet anyone's sales system."
Natural Foods Merchandiser volume XXIII/number 7/p. 1, 10