NET RIVALS WEBVAN AND HOMEGROCER TO MERGE

JON SPRINGER

FOSTER CITY, Calif. -- Webvan Group here said last week it would merge with its largest Internet rival, Kirkland, Wash.-based HomeGrocer.-com, in a stock deal valued at $1.2 billion.

The deal combines the two largest "pure-plays" in the Internet grocery business and, officials say, allows the combined company to compete not with one another, but with their brick-and-mortar counterparts.

"This deal combines the two premier Internet grocers with the capability to deliver the last mile of e-commerce," said George Shaheen, Webvan president and chief executive officer. "It will allow us to expand geographic coverage faster with less capital and allows us to focus on our brick-and-mortar competitors."

Under terms of the deal, HomeGrocer shareholders will get 1.076 shares of Webvan stock for every share of HomeGrocer stock. Based on Webvan's closing price Friday, the deal is valued at $1.2 billion. The deal is expected to close late in the third quarter or early in the fourth quarter.

The companies would operate under the Webvan brand name and be based in Foster City. Shaheen will remain president and CEO. As of May 30, the companies combined for 264,000 active customers and 6,200 orders a day with average order size of $98, Shaheen said.

Combining operations would allow Webvan to open in 15 markets by the end of 2001, and would lessen reliance on the capital markets, said Shaheen.

Webvan's stock was trading last week at about $6.50, down from a high earlier this year of $34. HomeGrocer, also trading around $6 last week, is down from its high of $16.25.

"This deal is as much about competition for cash as it was competition for customers," Andrew Wolf, securities analyst for BB&T Capital Markets, Richmond, Va., told SN.

Shaheen said the deal would allow Webvan to increase revenues by 50%, and require 50% less cash than the company would need without HomeGrocer.

Webvan expects revenues of $300 million to $325 million in 2000 and $1.1 billion to $1.2 billion in 2001, said Bob Swan, Webvan's chief financial officer. The combined companies had around $650 million in cash at the end of May, and would need an additional $275 million to meet their 15-city expansion goal.

In the event the capital markets remain reluctant to support tech companies, Webvan could curtail its expansion plans and self-fund growth "under some slightly more aggressive assumptions," Swan added.

Currently, the companies operate in nine metropolitan areas: Webvan in Atlanta, San Francisco and Sacramento, Calif., and HomeGrocer in Seattle; Portland, Ore.; Dallas; San Diego; Los Angeles, and Orange County, Calif.

The merger announcement came a week after HomeGrocer said it would delay its debut in Atlanta, which would have been the first market in which the Web grocers would compete head-to-head.

Webvan has announced plans to open in Chicago in August, and in northern New Jersey and Baltimore later this year. HomeGrocer's expansion plans, which have already been trimmed, are temporarily on hold.

The companies would have competed in at least nine markets by 2001. By combining their operations, the companies will save around $200 million in capital expenditures in 2000 and 2001, said Swan.

"Without the merger, both companies had to expend monies to win the customer from the brick-and-mortar alternative and then they each had to spend additional monies to win the customer from the other," Shaheen explained. "The total spend can now be more efficiently directed on the brick-and-mortar competitors."

Analysts told SN the combination makes strategic sense.

"I think they realized they were better off teaming up together than butting heads in the same markets," said George Dahlman, an analyst with U.S. Bancorp Piper Jaffray, Minneapolis. "They figured they would be wasting resources if they learned the same things independently."

The deal may eventually answer some questions about the effectiveness of various distribution and delivery strategies. Webvan's model calls for sophisticated, fully automated hub warehouses surrounded by regional delivery spokes. While the centers cost $30 million to $35 million to build, Webvan has long argued that its technological edge was at the heart of its strategy.

HomeGrocer, in contrast, operates smaller warehouses of around 100,000 square feet and said its lower costs (between $4 million and $7 million for each distribution facility) allowed the company to enter new markets quickly.

Shaheen said that distribution centers are among a number of issues the companies will examine over the coming months. "We'll undertake the best practices from both companies going forward," he said.

"I think Webvan will be able to find they can run HomeGrocer's centers the way they are for now. Will they eventually ramp up to Webvan's automated centers over time? They could," Peter Swan, an analyst for Pacific Growth Equities, told SN.

Dahlman said Webvan may find some superior practices at HomeGrocer. "It may wind up being a hybrid," he said. "Webvan may find that extensive automation is not necessarily the best way to go."

The merger was unanimously approved by the boards of both companies, but still requires shareholder and regulatory approvals. Jim Barksdale, partner of The Barksdale Group and former Netscape CEO, will join Webvan's board, as will two other HomeGrocer directors. Among HomeGrocer's largest investors is Seattle-based e-commerce giant Amazon.com, which purchased a 35% interest in the company last year.

Like Amazon, Webvan is aiming to become a nationwide portal for e-commerce in a variety of product categories.

Neither Web grocer was rewarded in the capital markets on the day of the announcement, with Webvan falling 16% to $7.31 and HomeGrocer falling 15% to $6.87. Both companies have been public for less than a year but have been trading below their IPO price for several months.

Analysts attributed the reaction to a general skepticism of e-tailers. But they said the move made good strategic sense for Webvan.

"Overall it makes sense for Webvan," Pacific Growth's Swan said. "They're going to need all the additional capital they can get considering how unfriendly the market has been. Rather than have two companies making parallel lines, they're combining their efforts."