Amazon is paying no small price to acquire Whole Foods—the online marketplace giant agreed to pay $42 a share in cash for the hugely popular chain of natural food stores, a grand total of $13.7 billion. But how was this number decided upon? Does the selling price match Whole Foods’ business valuation? By considering each company’s goals and breaking down the valuation of Whole Foods, we can better understand the factors that drove the deal between these retail behemoths.
Food retail has piqued Amazon’s interest for quite some time. The company launched its AmazonFresh grocery service in 2007 and has been slowly expanding itin the years since. Furthermore, in 2016, The Wall Street Journal revealed Amazon’s plans to open a chain of brick-and-mortar grocery stores, an undertaking dubbed Project Como. This plan has not been confirmed by Amazon, yet it hints at their strong interest in disrupting the grocery industry.
The launch of the Amazon Go Storefront at the end of last year was another strong indicator. The concept employs what the company calls ‘Just Walk Out’ technology, in which customers simply leave with the items they want and are billed through their Amazon Prime accounts later. With the acquisition of Whole Foods, it seems that Amazon now has all the tools it needs to become a superpower in the food retail space. By using Whole Foods brick-and-mortar shops, Amazon can roll out its own stores quickly—all they have to do is change the branding and implement their ‘Just Walk Out’ checkout system.
The deal also makes sense from Whole Foods’ perspective. Partnering with Amazon improves their logistics: they’ll be able to improve their grocery delivery service due to Amazon’s extensive delivery network, and they’ll also be able to leverage Amazon’s data to stock stores with the items people search for most in certain areas. The result? Lower costs and higher profits at Whole Foods.
The acquisition presented a way for Amazon to increase their sales by billions of dollars overnight—but they had to make the deal just as sweet for Whole Foods, too. Using Pomanda’s Business Valuation Calculator, we valuated Whole Foods and found that the business’s enterprise value was $10.64 billion. So why did Amazon pay $13.7 billion for the company?
The answer lies in the details of corporate valuation methods. In an acquisition, the market cap is the value of the target company’s equity, while the enterprise value is the value of the equity plus the value of the debt. As part of the deal, Amazon took on the debt of Whole Foods, so the enterprise value is the figure considered initially.
The acquirer also typically tacks on a premium to the actual worth of a company in order to make the deal more attractive to the target. This premium is particularly important in the acquisition of a company like Whole Foods, which would have many potential buyers interested in negotiating an appealing deal.
Considering these factors, the $13.7 billion figure is accounted for—and with Amazon’s grand plans for the grocery industry, they’re likely hoping it’s an investment that will pay for itself in the future.