With Whole Foods Market (WFM) under pressure from an activist investor, an acquisition by fellow supermarket chain Kroger (KR) may make a ton of sense.
Combined, Kroger and Whole Foods "would marry each company's strengths with the other's weaknesses, unlock massive cost synergies that could reach 3% of Whole Foods sales, help Kroger expand its customer base, and possibly provide the growth format it has been eager to develop," Credit Suisse analyst Edward Kelly wrote in a note on Thursday. A potential merger would provide scale and synergies in the "mature, oversaturated, and still fragmented [U.S. food] industry" attempting to ward off new market entrants like Blue Apron and stalwarts like Walmart (WMT) and Costco (COST) alike.
Kelly estimated that Whole Foods could fetch $40 to $45 per share, or an equity value of $12.7 billion to $14.3 billion, a premium of 14.6% to 28.9% over Wednesday's close of $34.91. While that potential purchase price would represent a trailing 12-month Ebitda multiple of 10 to 11 times, given a long-term average multiple of 8.1 times and an average multiple of 6.4 times since 2000 for Whole Foods, the high potential synergies justify the price tag says the analyst.
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