"We are removing Whole Foods from Investing Ideas on the rumor of Kroger buying Whole Foods," Hedgeye CEO Keith McCullough wrote today. "Howard Penney thinks that’s unlikely (see below). While he also thinks someone else should buy WFM, I think we can put this back on the II list at a lower price. Super long-term investors can hold it, but expect to average down some, from here."
Read Hedgeye Consumer Staples analyst Howard Penney's take below...
WFM stock got a 4.9% bump on Thursday amid unsubstantiated rumors that KR would buy WFM for $40 per share, a ~40% premium.
As much as we would like to have part of our thesis validated and see WFM get acquired, we think a deal with KR is unlikely at this time. WFM is a great business, and in this free money, late cycle environment we will continue to see speculation and deals across our coverage universe. To be honest, someone should buy WFM because it is on sale right now and you don’t often get great opportunities to buy solid companies on the cheap.
Acquiring WFM at the rumored price of ~$40 per share would amount to an equity value for WFM of ~$14.3 billion, add net debt and you get to an EV of ~$14.6bn (excluding fees). Taking KR’s cash of $1.2 billion, they would need to use an additional $13.4 billion in debt to get the deal done in all cash; stock cannot be a big part of this deal given the dilutive nature at current valuation levels. After accounting for additional EBITDA from the WFM business, adding this additional debt onto their balance sheet would increase their leverage ratio to ~3.6x.
In addition to the debt and dilution this acquisition would create in and of itself, KR is currently facing massive and growing issues from their multi-employer pension plans (MPP), which we have called out extensively. These plans continue to deteriorate and are a drag on KR’s business, as it was evident in the most recent quarter when they took a $0.07 charge.
As a result, we believe this acquisition is quite unattainable for KR.
