As is well known by now, the Federal Trade Commission is endeavoring to block the proposed acquisition of Wild Oats Markets by Whole Foods Market. Let's take a closer look at that because there's more here than meets the eye.
The mechanics of the situation are that the FTC issued a complaint seeking a temporary restraining order and preliminary injunction against the entire proposed $700 million transaction. On July 31, the parties are to appear before a U.S. District Court judge in Washington, D.C., to argue their points of view. Thereafter, the judge will issue the injunction, or not. If so, that would be tantamount to ending the proposed deal because it would take years to pursue an appeal to its conclusion.
The FTC's move to block this proposed deal in its entirety is far from unprecedented, but it is unusual. Generally, the FTC requires the divestment of stores in specific areas to bolster local competition. It seldom seeks to block an entire transaction. Indeed, the FTC's bureau of economics staged a conference in Washington last month at which methodologies were described that seemed to favor the deal. Those include the fact that the FTC has increasingly considered merger efficiencies — the theory that merged companies are more efficient and therefore consumers benefit — and that a larger variety of competitors would be considered in a merger context, such as the presence of supercenters. Add to that the pro-business outlook of the administration, and it looked like a slam dunk (SN, June 4).
Indeed, at the time the deal was announced, John Mackey, Whole Foods' chairman and chief executive, remarked that “Safeway, Kroger, Supervalu and Wal-Mart are all selling the same products, and I don't contemplate why there should be any [FTC] problem.” (SN, Feb. 26.) That competitive assessment is correct, so what electrified the FTC into action?
It's possible to pick up some clues by studying the text of the FTC's 17-page complaint, although more than 50 lines in the publicly issued version of the document are blacked out. Intriguing example: The complaint begins by asserting that the “proposed transaction … will substantially lessen competition and thereby cause significant harm to consumers.” It goes on the say that “Mackey bluntly advised his board of directors of the purpose of this acquisition: [the next eight lines are blacked out].” Based on earlier reported statements of Mackey, and the musings of securities analysts, it might be surmised that Mackey said that the purpose of the acquisition was to jump-start growth and to mute competition at the same time.
Possibly backing that notion, it's asserted later in the FTC complaint that “the acquisition may substantially lessen competition and/or tend to create a monopoly in the operation of premium natural and organic supermarkets across the United States.” Later still, “premium natural and organic supermarkets offer a distinct set of products and services to a distinct group of customers in a distinctive way, all of which significantly distinguish [such] supermarkets from conventional supermarkets and other retailers of food and grocery items.”
This appears to be the crux of the matter: That Whole Foods and Wild Oats are, in the minds of consumers, a unique proposition and so the fact that other retailers sell similar products doesn't much matter.