Jun 17, 2017
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Amazon takeover of Whole Foods has US retail on edge

Jun 17, 2017

Amazon's shock decision to buy upscale grocery chain Whole Foods delivered another dose of pain to US retail, which was already one of the most problematic sectors of the year so far.

Retailers wonder if the Amazon Whole Foods deal upends grocery retail, which sector is next? - REUTERS/Brendan McDermid

While Whole Foods bonds bounced on news of the US$13.7bn takeover by one of the most famous companies in the world, most of the rest of retail took a pasting in bonds and equities alike.

Amazon's peer Walmart saw its share price down more than 6% within an hour of the news, while stock in grocery chain Kroger was off more than 15%.

On the fixed income side, bonds across the retail sector were thumped by news of the acquisition, which was expected to squeeze margins in a sector with precious little room to give.

Kroger was one of the hardest hit in investment grade, as its bonds gapped out up to 29bp shortly after the news, according to MarketAxess data.

In high yield, meanwhile, organic Whole Foods rival The Fresh Market's bonds fell as much as 3.8 points to 83.9 cents on the dollar.

And there was plenty of hurt outside the grocery space, with outstanding bonds from clothing retailer JC Penney and pharmacy chains Rite-Aid and CVS also clobbered in secondary trade.

"There is pressure on everybody," said Renato Latini, a credit analyst at asset manager Brandywine Global.

"Amazon are going to source products. If their technology applies down the supply chain - and to the extent that is proprietary - they could pinch the competition."


Retail has been the only sector to have a negative return in the junk bond space this year, as consumers increasingly shun brick-and-mortar stores in favour of online shopping.

According to data from JP Morgan, US retail high-yield bonds posted negative returns of 0.31% as of June 9, compared to gains of 4.58% for US junk bonds as a whole.

While clothing retailers have suffered, the problems have also been acute for grocery chains, which have been dealing with fierce competition, falling food prices and declining same-store sales.

"Retail is already a highly competitive sector with pretty thin margins, especially in the grocery space," said Matt Kennedy, head of corporate credit at Angel Oak Capital Advisors.

Before news of the acquisition broke on Friday, Whole Foods had been under pressure from activist hedge fund Jana Partners, one of the largest shareholders with a roughly 8% stake.

Whole Foods shares had been trading at about US$65 in October 2013, but plunged to around US$27 in September of last year.

With Jana agitating for change, the company turned to investment bank Evercore Partners to advise on strategy, sources told IFR.

According to a filing, Goldman Sachs and Bank of America Merrill Lynch provided a 364-day senior unsecured bridge term loan facility of up to US$13.7bn to help fund the acquisition.

Some of that is expected to be taken out in the bond market. The acquisition is expected to close in the second half of 2017.

One head of bond syndicate at a Wall St bank, not directly involved in the financing, said it may be a few weeks before a bond deal is launched.

And while much of the retail sector was pounded on the news, Amazon saw its shares up 3% while Whole Foods shares jumped more than 27%.

The only outstanding Whole Foods bonds, a US$1bn 5.2% 2025 issue, was quoted more than 100bp tighter after the deal was announced.

Whole Foods sits on the cusp of junk status with a Baa3 rating from Moody's and a BBB minus from S&P.

But the agencies have differing views on Amazon, rated Baa1 by Moody's and AA- by S&P.

"They are being bought by Amazon, which you can consider a Single A credit," one trader told IFR. "It's one of the best-run companies on the face of the earth."


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