Wal-Mart is one of few candidates. Its $230 billion market value dwarfs listed U.S. grocers, including Target, Kroger and Sprouts Farmers Market, as well as private Albertsons. Its balance-sheet cash could in theory finance nearly half the acquisition and, with total debt currently at about 1.5 times EBITDA, it could borrow more.
Adding an upscale brand might help Wal-Mart attract new customers and boost its grocery business. Yet that would be a change of direction. Its recent strategy has been to improve its e-commerce offering, including with Friday’s deal to buy men’s clothing e-tailer Bonobos.
Financially, too, topping Bezos’ offer would be tough. Assume Wal-Mart is able to cut Whole Foods’ operating costs by a generous 3 percent, or about $450 million a year. Taxed at 35 percent and capitalized on a multiple of 10, those savings are worth just under $3 billion today, roughly the same as Amazon’s premium. Wal-Mart would be irrational to pay more, especially since it would also have to cover a $400 million break fee.
This math applies to any interloper. Likewise, even hefty cost cuts won’t make Whole Foods’ EBITDA expand enough for the after-tax return on an acquisition to exceed the 8.6 percent weighted-average cost of capital Morningstar attaches to the company. Whatever clicks-to-bricks magic Bezos has in mind, his advisers have done the trick of making his deal hard to beat.
Request a free trial of Breakingviews here.