What's next for Whole Foods, Wild Oats?

Allison Linn Senior writer • Profile • E-mail

When word got out that the Federal Trade Commission would try to block Whole Foods Market’s proposed takeover of rival grocer Wild Oats Markets, even some who regularly follow the regulators admitted to being a little perplexed.

Then the details emerged. In subsequent filings, the FTC has quoted Whole Foods’ Chief Executive John Mackey as telling his board of directors that taking over the rival would eliminate price competition in some markets and prevent another large grocer from building a formidable competitor.

Those revelations, plus the disclosure that Mackey regularly made anonymous Internet postings that at times bashed Wild Oats, leave the proposed $565 million acquisition on shaky ground. The hubbub is renewing speculation about what will happen to the two high-end, natural and organic grocers if the government blocks their proposed marriage.

Late Tuesday, Whole Foods' board of directors said it would conduct an independent investigation into Mackey's online postings, and the company confirmed that the Securities and Exchange Commission has launched an inquiry into the postings.

In a statement, Mackey said, "I sincerely apologize to all Whole Foods Market stakeholders for my error in judgment in anonymously participating on online financial message boards."

Stephen Calkins, formerly general counsel for the FTC and now a professor at Wayne State University law school in school in Detroit, said the online postings, while potentially damaging to the CEO's credibility, do not threaten the proposed takeover as much as the comments he made to his board of directors.

“It’s hard to imagine a merger case where a company communication is more harmful than has occurred here,” said Calkins said. “When a CEO communicates to his board, setting out an anticompetitive rationale for a merger, that’s about as good as it gets for a prosecutor.”

Still, Calkins said the case is by no means a slam-dunk for the FTC. For starters, he said, the government hasn’t won a big merger case in a while, and recent case law would seem to make the attempt more difficult.

In addition, despite Mackey’s comments, Calkins believes that the FTC hasn’t yet provided enough data on the two stores’ pricing strategies to show clearly how a merger might hurt consumers at the checkout stand.

“Even though Mr. Mackey has said very unhelpful things, Whole Foods can still win this case,” Calkins said.

In court documents, the FTC has alleged that when one of the companies enters a market, the other responds by lowering prices, remodeling the store or making other changes. It argues that although there are plenty of other stores offering organic and natural foods, the two companies consider each other to be the greatest competitive threat.

Although the outcome is far from clear, some who follow the companies are bracing for the possibility that takeover will fall through. In a research note released last week, Bear Stearns analyst Robert Summers said that, given the most recent revelations, “(W)e believe the FTC case against the merger appears solid and are now leaning more toward the FTC prevailing in its injunction.”

That, he added, would take away a “potential positive catalyst” for Whole Foods’ shares.

Wall Street is eager for Whole Foods to find something that will spur growth. The proposed million deal, announced in February, came just a few months after Whole Foods conceded that it didn’t expect to be able to sustain the incredible growth it had experienced over the past few years.

Shares of Whole Foods, which were trading around $65 last fall, fell sharply after that disclosure and have been unable to make up much ground. The shares currently trade around $40.

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