FTC Files Suit to Block Merger of Supernaturals

MARK HAMSTRA

WASHINGTON — Whole Foods and Wild Oats hit a major stumbling block in their efforts to merge last week when the Federal Trade Commission said it would seek a preliminary injunction to block the transaction.

At issue is whether or not Whole Foods would price its products higher in a market in which it did not compete with Wild Oats than it would in a market where two chains both operate stores. In a prepared statement, the FTC explained that it considered Whole Foods, Austin, Texas, and Wild Oats, Boulder, Colo., to be together in a retail category that is distinct from traditional supermarkets, in part because of the breadth and quality of their perishable offerings, their store ambiance and the nature of their customers.

“If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality and fewer choices for consumers,” said Jeffrey Schmidt, director of the FTC's Bureau of Competition, in a prepared statement.

Both Whole Foods and Wild Oats said they would still fight to consummate the deal, however, and antitrust experts told SN there is still reason to believe the transaction could go through.

“The interesting thing is that the FTC has litigated twice in the last month and lost both times,” said Stephen Calkins, director of graduate studies at Wayne State University Law School, Detroit, and a former FTC attorney.

Those cases, one in New Mexico and the other in Pennsylvania, both involved energy companies that ended up merging despite the FTC's objections by convincing a federal district court judge that the market they competed in was broader than the FTC had defined it.

Calkins said the Whole Foods-Wild Oats deal may be most similar to the attempted merger in 1997 of office-products superstores Staples and Office Depot. In that case, Calkins said the FTC had documents showing that in markets where Staples, Office Depot and a third competitor, Office Max, competed, Staples had lower prices than in markets where the three chains did not compete, even though other competitors, such as Wal-Mart and Target, also sold many of the same products.

“I am guessing, just from the fact that the FTC filed a lawsuit, that the FTC has documents showing that prices are lower in places where Whole Foods competes with Wild Oats than where it does not,” Calkins said.

The challenge for Whole Foods will be to “show that the information the FTC has is dated and does not reflect the future reality,” he said.

Whole Foods, which has retained the Washington law firm of Vinson & Elkins to argue its case, would need to show that it competes not only with Wild Oats but also with other retailers, such as traditional supermarkets. The case could be expected to last about six to eight weeks.

If a judge issues a preliminary injunction against the merger, it could take years for the case to proceed to a full administrative hearing at the FTC, according to James Fishkin, a partner in the Washington law firm of Dechert LLP and a former FTC attorney.

“A preliminary injunction, which the FTC is seeking, essentially has the effect of a ruling against the merger, because the parties are unlikely to be willing to litigate for several years to complete their merger,” he told SN.

The last time the FTC sought to block a supermarket merger was in 2000 when it recommended against Kroger's attempted acquisition of Winn-Dixie's stores in Texas and Oklahoma, he said. In that case, the two parties agreed to call off the deal before the preliminary injunction hearing was completed.

“These are rare occurences where the FTC decides not only to challenge the merger, but seeks to block the merger entirely,” Fishkin said. “In most cases where the FTC finds the merger in violation of the federal antitrust laws, they simultaneously reach an agreement with the parties to divest a certain number of overlapping stores.”

One of the problems the FTC faces in the Whole Foods-Wild Oats case, according to William Kolasky, a partner in the Washington law firm of WilmerHale, is that historically, the FTC had not defined the grocery market as narrowly as it has in this case.

“I shop at a Whole Foods that's three or four blocks away from a Safeway, and the notion that Whole Foods and Safeway don't compete with one another is a little bit counterintuitive to me as a consumer,” he said. “Our local Safeway has started carrying many of the same brands Whole Foods carries and has expanded its produce section.”

He noted that both the FTC and the Justice Department, which has co-jurisdiction over the antitrust laws, have “not had a good track record” in recent cases in which they have done a “narrow, counterintuitive market definition,” he said.

In addition to the two energy-company mergers that the FTC recently failed to block, the Department of Justice also recently failed in its efforts to block two mergers in the technology industry — one between SunGard and Comdisco and another between Oracle and PeopleSoft.

“In both of those cases [the DOJ] was pursuing a very narrow market definition,” Kolasky said.

Whole Foods and Wild Oats together operate just over 300 stores, which overlap in about two dozen markets. In February Whole Foods said it had agreed to acquire Wild Oats for nearly $700 million.