NEW YORK -(Dow Jones)- Federal regulators, looking to thwart a merger that would create a colossus in the U.S. organic supermarket business, will try to block Whole Foods Market Inc.’s (WFMI) planned acquisition of rival Wild Oats Markets Inc. (OATS), the companies said Tuesday.
Whole Foods, of Austin, Texas, which in February agreed to buy Wild Oats in a $565 million deal to create the nation’s largest organic grocery chain, said it expects the Federal Trade Commission to file a federal lawsuit requesting an injunction to stop the merger. In March, Whole Foods said FTC officials had raised concerns about “perceived anticompetitive effects” resulting from the deal.
Shares of Whole Foods fell $1.21, or 2.9%, to $40.48. A thwarted merger would deprive Whole Foods of sales and profits the Wild Oats stores are expected to contribute over the next few years, leaving Whole Foods to rely on a more costly store-building program. Meanwhile, shares of Wild Oats rose amid speculation the chain might find a new suitor.
Whole Foods said it plans to vigorously challenge the government’s opposition in federal court. Legal analysts said the outcome likely will hinge on the court’s interpretation of which market the companies operate in – the natural- foods market or the broader supermarket industry.
“The FTC has failed to recognize the robust competition in the supermarket industry, which has grown more intense as competitors increase their offerings of natural, organic and fresh products,” Whole Foods Chairman and Chief Executive John Mackey said in a written statement.
The FTC confirmed it will seek to block the deal. Lawyers close to the investigation confirmed the companies’ statements and said the agency is preparing to file a complaint in U.S. court as soon as Wednesday.
The agency’s opposition is based on the argument that there is a separate market segment for organic-foods chains and that in many cities the deal would lessen competition in that segment, leading to higher prices.
The merger would create the dominant specialty chain in the fast-growing niche of organic food retailing – a highly fragmented business in which both chains have been steadily grabbing market share. That could be perceived as a potential antitrust worry for regulators.
Yet proponents of the tie-up argue that it comes as traditional supermarkets such as Kroger Co. (KR) and Safeway Inc. (SWY) have ramped up their investments in natural foods and fresh meats and produce. Whole Foods spokeswoman Kate Lowery said Tuesday that these traditional chains have been “renovating their stores to look a lot like Whole Foods markets.”
Sales of natural and organic foods are growing far faster than those of traditional fare, thanks to affluent shoppers who are willing to pay higher prices for foods with a healthy image. Last year, even Wal-Mart Stores Inc. ( WMT) began pressing its suppliers to produce more organic offerings.
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