Published January 13, 2015
U.S. antitrust authorities said Tuesday they would file suit to block Whole Foods Market Inc.'s (WFMI) proposed acquisition of rival Wild Oats Markets Inc. (OATS) on grounds that the deal would hobble competition in the market for natural and organic groceries.
The Federal Trade Commission said it would challenge the transaction in federal court because it would eliminate competition between "two uniquely close competitors" in many local markets around the United States.
"If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality, and fewer choices for consumers," FTC competition bureau chief Jeffrey Schmidt said in a statement.
However, the companies said they would fight the FTC in court, arguing that the merger should be allowed to proceed in light of the fierce competition in overall grocery business.
Whole Foods, the largest natural and organic grocer, announced plans to buy Wild Oats in February, after coming under increased pressure from mainstream grocers that were selling more organic, natural and prepared fare.
The lawsuit comes less than a month after Whole Foods said FTC staff members had voiced concerns over the perceived anti-competitive impact of the planned deal.
The FTC is seeking a temporary restraining order on Whole Foods buying Wild Oats shares until the U.S. District Court for the District of Columbia resolves the FTC's request for a preliminary injunction.
Whole Foods asserts that the FTC is looking at the deal in the wrong way by focusing on the natural and organic grocers, rather than looking at the overall industry.
Whole Foods and Wild Oats lead the organic niche, but their total food sales pale in comparison to larger retailers.
"The FTC has failed to recognize the robust competition in the supermarket industry, which has grown more intense," Whole Foods Chairman and Chief Executive John Mackey said in a statement.
The FTC countered that the Whole Foods and Wild Oats compete in a market that is separate from the traditional grocery market and seek out different customers than traditional grocery stores.
"Whole Foods' and Wild Oats' customers are buying something more than just the food product -- they are seeking a shopping 'experience,' where environment can matter as much as price," the FTC said.
However, the two companies pointed out that mainstream grocers have been encroaching on Whole Foods over the past few years, putting pressure on its rapid growth.
Whole Foods, which has 195 stores, rang up less than $5.61 billion in sales in its fiscal year ended in September, while Wild Oats has annual sales of about $1.2 billion and 110 stores.
Kroger Co., the largest mainstream grocery chain, posted $66.1 billion in sales for its fiscal year ended in February and has more than 2,460 grocery stores. It also operates hundreds of convenience and jewelry stores.
The deal is the latest in a string of changes in the grocery industry, which has had to respond to stepped up food sales at discount chains such as Wal-Mart Stores Inc..
Albertsons Inc. was split up among a group of buyers in 2006 and now Great Atlantic & Pacific Tea Co. Inc. (GAP) aims to buy rival Pathmark Stores Inc. (PTMK). The FTC requested additional information on that deal in April.
Whole Foods' Mackey also said that the FTC "evidently" does not appreciate planned benefits for consumers, such as a plan to improve many of the stores Wild Oats owns.
Shares of Austin-based Whole Foods closed down $1.21, or 2.9 percent, at $40.48 after falling as low as $39.94 on Nasdaq. Shares of Boulder, Colorado-based Wild Oats rebounded to end the day up 25 cents, or 1.48 percent, at $17.16 after sliding to $16.00.
In February, Whole Foods said it planned to buy smaller rival Wild Oats for $18.50 a share, or about $565 million, plus the assumption of debt. It originally expected to close the acquisition in April.
On May 22, Whole Foods extended its tender offer for Wild Oats for a third time, until June 20, even though enough shares have been tendered, as it waited to hear whether U.S. regulators would challenge the deal.