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Jun 16, 2017

S3 Research: Amazon Adds Whole Foods to its Shopping Cart

Amazon.com Inc.’s (AMZN US) foray into the Food & Staples Retailing sector took a surprising turn with its announced acquisition of Whole Foods Market Inc. (WFM US). AMZN is offering $42/share for WFM, a 27% premium to Thursday’s closing price, making the deal worth $13.7 billion. AMZN has been expanding into the Retail Food sector via its AmazonFresh Grocery and Amazon Pantry divisions and brick and mortar food retailers have felt the pressure and stock effect of AMZN’s online dominance. WFM short interest is $1.19 billion after its price shot up to $41.99 after the acquisition was announced, and WFM continues to be largest short in the U.S. Food and Staples Retailing sector. Short sellers were already down $153 million in year-to-date mark to market P/L before the announcement, they incurred an additional $250 million in losses on today’s 27% price move. Shorts are now down $404 million year-to-date, or down 36.3%, on an average yearly short position of $1.1 billion.

Short sellers had already increased their Food & Staples Retail Sector exposure in response to AMZN’s online expansion plans and while WFM short sellers have been eviscerated by this deal, shorts sellers in other U.S. and international food & staples retailers have had a profitable day with most of the sector reeling from the potential competition of the Amazon/Whole Foods partnership. Worldwide short interest in the entire Food & Staples Retail sector is $26.0 billion, with $12.1 billion specifically in the Food Retail sub-sector. Short sellers have been active in the sector over the last month, with short exposure increasing $918 million in Food & Staples and $444 million in Food Retail.

Most of the short interest in the U.S. Food & Staples Retailing sector is fairly concentrated, with the top ten shorts making up $10.9 billion of the total $12.9 billion of short interest in the sector. WFM is the largest short in the U.S. Food Retail sector, but in the broader Food and Staples Retailing sector it is fourth behind three mega-caps.

Although WFM short sellers were down $250 million today, the rest of the U.S. top ten were up $529 million, or 5.4%, on today’s takeover news. WFM short sellers were not expecting AMZN to go the brick and mortar route in their quest to dominate the Retail Food sector. When entering new business lines AMZN has preferred to use its global strength in distribution, breadth of products, and massive sales volume to crush its competitors via higher margin online retailing.

It would not be implausible to think that shorts sellers thought that WFM would be a casualty in AMZN’s Retail Food expansion and then be bought out “on the cheap.” It is a double play of sorts, profiting by shorting WFM on the way down and reversing positions when WFM’s stock price bottoms out, thereby getting WFM long exposure cheaper while waiting for a possible takeover at discounted and more attractive prices.

Short interest in the international Food & Staples Retailing sector is just as concentrated as in the U.S. The top ten shorts make up $10.2 billion of the total $13.1 billion of short interest in the sector.

With AMZN’s global online reach and purchase of retail food brick and mortar WFM beachhead, AMZN is now a threat not only to domestic/U.S. food and staple retailers, but also to Canada and abroad. European retailers must now be wary of AMZN’s established distribution network making it easier to expand WFM’s predominantly domestic presence (only 3% of sales is generated out of the U.S.) to any locale across the globe. Early reaction to the news made international Food and Staples sector short sellers $474 million in mark to market P/L, a one day return of 5.90%.

With WFM’s stock price already at AMZN’s offer price, shorts will probably begin covering their positions. If WFM’s stock price rises over the $42 offer price, either longs are looking for a sweetened offer from AMZN or a competitor, or shorts are nudging the price higher as they buy back the over 34 million shares they have shorted.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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