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Whole Foods for sale?

A tight capital market and recent investment activity for Whole Foods Market is sparking debate over whether the retailer might have a new owner in the future. Investors are speculating based on Whole Foods Market's recent settlement with the Federal Trade Commission over the company's acquisition of Wild Oats Markets, along with two notable stock purchases by high-profile investors.

Never say never, analysts advise. But some also argue that given current factors, a sale anytime soon is unlikely.

In the FTC settlement, announced in March, Austin, Texas-based Whole Foods agreed to divest itself of 31 Wild Oats stores, including 19 stores that already had closed, and one Whole Foods store. In exchange, the FTC dropped its legal challenge to the merger. Edward Aaron, an analyst with RBC Capital Markets in Denver, sees the settlement as "a positive. Those stores are the dogs of the portfolio."

But with the merger finally a done deal, the two large acquisitions — and who made them — led to the rumors about a possible sale.

Last November, Los Angeles-based private equity firm Leonard Green & Partners bought $425 million in preferred stock in Whole Foods, convertible into common shares that would give Leonard Green a 17 percent stake in the grocer. As part of the deal, two executives at Leonard Green joined Whole Foods' board of directors. Aaron says the sale occurred because, with credit markets frozen, Whole Foods was running out of money. "They needed capital. Leonard Green was invited in by management."

Analyst Matt Arnold of St. Louis-based Edward Jones calls the investment "a big deal. In Leonard Green they got a financier who could exert some good strong financial influence [with the two board seats]. That investment completely eliminated [Whole Foods'] survival fear" and allowed the company to grow.

Then in January, Los Angeles supermarket mogul Ron Burkle's Yucaipa Cos. revealed in a Securities and Exchange Commission filing that he had bought up to 7 percent of Whole Foods shares.

In addition to his storied friendship and business dealings with former President Bill Clinton, billionaire Burkle is widely known as an activist investor who built his fortune by buying and selling such supermarket chains as Ralph's and Fred Meyer. In 1999, Burkle sold Fred Meyer to Kroger for $13.5 billion, creating the largest supermarket chain in the U.S. At the time Whole Foods offered to buy Wild Oats in 2007, Burkle was Oat's largest shareholder, with an 18 percent stake.

Burkle said in the January filing that he would keep Whole Foods shares as an investment, but that he also would "closely monitor the company's performance" and could modify his plans depending on Whole Foods' "business prospects and financial position, other developments … and opportunities."

Andrew Wolf, an analyst at BB&T Capital Markets in Richmond, Va., told the Los Angeles Times: "Ultimately, what Yucaipa has done with other companies is acquire, merge and then sell. Look at Wild Oats, where they acquired stock, put in management and sold the company."

But according to other analysts, that was then. This is now.

With his investment in Whole Foods, "Burkle saw unrealized value in the asset," Aaron says. "Give the guy credit. He bought Wild Oats at $10 a share, and turned around and sold it" for $18.50 a share, or $94.4 million. "And he bought Whole Foods on the cheap."

But neither Aaron nor Arnold sees much motivation for Whole Foods to sell. And they point out that this is a less than ideal buying environment for either financial buyers or large food chains.

In addition, Whole Foods continues to differentiate itself as a natural foods retailer. "Never say never, but this is a management team that deeply values its culture," Aaron says. "And it's a growth opportunity they would be very reluctant to sell. The stock trades at a big premium to almost all its retail peers."

Says Arnold: "It's complete speculation on my part, but Whole Foods is not necessarily in need of a buyer. You can never rule it out, but the advice we've been giving to our shareholders is you can't count on it."

Jane Hoback is a Denver-based writer and editor.

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