Amazon buying Whole Foods – Notebook

I was on vacation last week, so this notebook is a little stale. Perishable news. (JOKES!)

The basics

  • The deal size is $13.7bn, a 30% premium; expected to close in the second half of this year (Todd Bishop)
  • Highly likely to remain independent: “Reading between the lines of Bezos’ statement, Amazon is signaling that it doesn’t plan to disrupt what Whole Foods is doing with a major shakeup of the retailer’s infrastructure or strategy in the near term. Amazon has a history of allowing acquired companies — from Audible to Twitch to Zappos — to continue operating with relative independence, with some product and feature integrations.” (Ibid.)

Not good for competition

  • Investors really believe in that AMZN magic: “In total, those five grocery chains [Target, CostCo, Kroger, Walmart, SuperValu] shed about $26.7 billion in market capitalization between the market’s close Thursday and Friday morning, as investors worried that Amazon deeper push into the industry could be a death knell for some.”
  • EU too: “The worries weren’t just contained to U.S. markets. Some investors in the U.K. and Europe also saw the purchase as a sign that Amazon could take its grocery ambitions global. Shares of French retailer Carrefour fell sharply on the news, about 4%, while in London, Tesco shed 6% and Sainsbury dropped 5%.”
  • See chart too.

Synergies, strategies

  • More brick-and-mortar, foot-traffic, and distribution centers for Amazon: “the acquisition provides the AmazonFresh program, currently only in 15 markets, with 465 new locations [the Whole Foods stores] that generate eight million customer visits per week as well as 11 warehouses.”
  • Amazon now has a big foot-print across the US, at least in affluent neighborhoods.
  • Like Amazon, Whole Foods is big into private label: “Whole Foods generates $2.3 billion worth of private label and exclusive brand sales per year; its private label products account for 32% of items in Instacart’s food category, taking up far more of the shelf than Walmart Grocery (16%) and Peapod (6%).”
  • (Further) driving down supplier costs: “It’s also possible that Amazon will use Whole Food’s partnerships with suppliers to get more of them on the Amazon platform. Amazon and Whole Foods will be tough negotiators, but the lure of the 300 million customer accounts on Amazon.com, in addition to all of its other CPG-related programs, will be tough to turn down.”
  • More: “he scale at which Amazon is making use of this strategy should force CPG brands and Big Box retailers to make some major changes to their distribution strategies.”
  • Ben Thompson, with some multi-sided platform theory sprinkled in:
  • “The truth, though, is that Amazon is buying a customer — the first-and-best customer that will instantly bring its grocery efforts to scale.”
  • “What I expect Amazon to do over the next few years is transform the Whole Foods supply chain into a service architecture based on primitives: meat, fruit, vegetables, baked goods, non-perishables”c
  • “At its core Amazon is a services provider enabled — and protected — by scale.”
  • This should remind you of the “middle-man”/unpaid for buy in my warehouse/drop-ship type of advanced retail play that the likes of Dell made famous.
  • I want pizza and baby-wipes, not software – this kind of argument (though, not really “invalid”) makes me bristle. It’s like a pizza company saying they’re a technology company. As long as the pizza comes in the box and the paper-towels come in the mail, they can call themselves whatever they want…but the pizza shop and Amazon are, to me, a pizza and retail company. How they get the pizza into my mouth is not my problem. Since I’m a paying customer in these instances, it’s not like the “you are the product” epiphany of .com, eye-ball companies.

Instacart?

  • Whole Foods had invested in Instacart in May 2016. What up with that, now?
  • Laura Entis: “Just last year, Instacart and Whole Foods signed a five-year delivery partnership, which gave Instacart exclusive rights to deliver Whole Foods’ perishable items.”
  • I guess it’d make sense for someone like Walmart to acquire them. Can Instacart be stand-alone now?

Getting that cash

  • For TAM:
  • FMI put estimate the US TAM at $668.680bn in 2016.
  • Statista, on the US market: $606.26 in 2015.
  • Very old, but the USDA in 2011 said, “The [US’s] 212,000 traditional foodstores sold $571 billion of retail food and nonfood products in 2011.”
  • Online grocery TAM: “Last year, online grocery sales were about $20.5 billion.” The growth rates, of course, are huge compared to in-store.
  • More market slicing numbers.
  • Room to grow, future cash to grab:
  • “Grocery remains the most under-penetrated e-commerce category, with less than 5% of sales happening online. However, with 20% of grocery sales estimated to begin online by 2025, brands investing in digital will reap the rewards.” (Elisabeth Rosen)
  • Online groceries penetration: “The online grocery business is still in its infancy. Last month, for example, 7% of U.S. consumers ordered groceries online, according to Portalatin. Of this group, 52% already has an Amazon Prime account. Groceries represent “the final frontier for Amazon — they haven’t quite cracked the code on that, but they already have a relationship with consumers.”
  • Some interesting grocery spending trends, by demographic, from Nielsen in 2015, via Cooper Smith:

grocery-spending.png

  • Mint says that last year, my family of two adults and two kids spent ~$15,000 at the grocery store. So that’s around what you’re upper-middle-class people (or whatever I am somewhere in the 90th percentile) spend, I guess.

For us consumers…

  • Many predict either free or highly discounted delivery fees for Amazon Prime members. That certainly makes sense as Amazon Video and Music, and Prime Now, shows.

More

In finance, large banks seem to be fast followers, not disruption victims

Eventually every advisor will be a robo-advisor, which means there will be convergence.

Without some marketshare numbers, it’s tough to tell if the banking startups are making a dent against incumbent banks. Josh Brown suggests that banks are quick to catch-up and have nullified any lead that companies like Weathfront could have made:

It wasn’t long before the weaker B2C robo-advisors folded, the middling players were acquired and the incumbents launched their own competing platforms. The miscalculation on the part of the disruptors may have been the idea that they had years of lead time to scale up their assets before the lumbering giants of the industry would be able to fight back. Turns out they only had months, not years. Charles Schwab and Vanguard launched their own versions of the service and the mindshare / market share battle was joined.

Checks out

From what I see out there, banks are quick to adapt and adopt new ideas into their businesses. While they’re beset with endless legacy IT and technical debt, they churn ahead nonetheless, e.g.:

While past performance is no guarantee of future results, and even though all the company’s results cannot be entirely attributed to BBVA’s digital transformation plan, so far many signs are encouraging. The number of BBVA’s digital customers increased by 68% from 2011 to 2014, reaching 8.4 million in mid-2014, of which 3.6 million were active mobile users.

Acquisition isn’t always failure, or victory

On the narrative framing side, it’s easy to frame a startup being acquired as “failure” and success for incumbents. That’s not always the case, and suggests a zero-sum view of innovation in industries. Acquisitions can have winners and losers – as with valuing anything, like real estate, the valuation could be wrong and in favor of the buyer or seller.

However, in the ideal case of an acquisition, it makes strategic sense for the buyer to spend their time and money that way instead of trying to innovate on it’s own. For the startup being acquired, they’re usually near the end of their gamble of sacrificing profit in favor of innovation and growth and need someone to bring them to the black.

Link

Picking off the slow-movers: $15bn for tech PE now sloshing around at Silverlake, more to come

Silver Lake plans to announce on Tuesday that it has closed its fifth buyout fund at $15 billion, one of the biggest ever dedicated to technology deals. That exceeds the $12.5 billion fund-raising target that the firm had previously aimed for and brings the firm’s total assets and committed capital to about $39 billion.

They seem to get good returns:

Silver Lake’s fourth fund, with $10.5 billion under management, currently boasts returns of nearly 31 percent, according to the data provider PitchBook.

Meanwhile, as Dan Primack mentioned, you can expect $100bn from SoftBank.

What this means is that more older, lower growth software companies will be taken private. More than likely, their day-to-day operations will be optimized to get their cash-flow fixed up and increase profits. These companies can then act as cash machines and find some exit after the PE owners “fix” management and operations problems at the company.

That usually means consolidation, which results in firing people, but also fixing stubborn “frozen middle” problems that have preventing each product line from evolving and getting a better ongoing product/market for, meaning: being something that customers want to use and keep buying. There can also just be a lot of “bloat” in older product lines, esp. when it comes to effective product management, marketing, and developers following old, slow, but comfortable processes.

And, sometimes, as you see at IBM, you just have to shut down old business in favor of building new ones. This means a top-line revenue hit, which means slowing or killing quarterly growth. As IBM has been demonstrating for 20 quarters, when you’re public, ain’t nobody got time for that. In theory, when private, you can choose that option.

As Brenon at 451 has noted, going private deals like these are growing much more than “corporate” acquisitions (like when Microsoft, Cisco, IBM, etc. buy a company to integrate into their product portfolio rather than optimize the company as discussed here). It doesn’t always work, but that “nearly 30%” return indicates that it works more than enough.

Link

PE tech acquisitions rising, while corporate deals slow

The dramatic surge in PE activity is primarily due to the ever-deepening pool of financial buyers. In the history of the industry, there have never been more tech-focused buyout shops that have had access to more capital, collectively, than right now. New firms have popped up while existing ones have put even more money to work in the tech industry, which is becoming even more ‘target rich’ as it ages. For instance, both Clearlake Capital and TA Associates announced as many deals in Q1 2017 as each of the firms would typically print in an entire year. Additionally, both Vista Equity Partners and Thoma Bravo averaged almost two transactions per month in Q1, if we include deals done by their portfolio companies as well.

From Brenon at 451, and with some charts too:


Link

Final prices for Dell Services and Software divestitures: $3bn & $2.4bn

On March 27, 2016, Dell entered into a definitive agreement with NTT Data International L.L.C. to sell substantially all of Dell Services for cash consideration of approximately $3.0 billion. On June 19, 2016, Dell entered into a definitive agreement with Francisco Partners and Elliot Management Corporation to sell substantially all of Dell Software Group for cash consideration of approximately $2.4 billion.

Link

At $3.7bn, AppDynamics sells to Cisco at 17.3x, estimated

Based on the S-1 filings from the business, a $3.7B price implies a 17.3x enterprise value/trailing twelve month revenue multiple, which is 41% higher than the next nearest acquisition, Salesforce/Demandware. There’s no comparable pricing event in the M&A market in the last 10 years.

And, from Simon at The Register:

The Borg’s plucked the company mere days before it was expected to float on the stock market, an event expected to raise around US$1.4bn for a portion of the company.

While AppDynamics could point to over 2,000 customers and nine-figure revenues, it also had rather a lot of red ink to deal with. That’s Cisco’s problem now, as it will make AppDynamics a software business unit in its internet of things and applications business.

Source: The Biggest M&A Multiple in Software History

TheNewStack: Gartner Purchase of Corporate Executive Board Would Address Changes in IT Advisory Market

Lawrence Hecht has some brief commentary on Gartner buying CEB for $2.6bn – Lawrence takes out the $700m in debt from the actual deal value of $3.3bn. I don’t really know CEB too well.

He also covered some recent analysis of the analyst industry, including the post I did on the topic and podcast at KEA on the idea with other analyst-types, both back in 2015.

All seethe official press release.

Here’s some share price performance, snipping out the time around the acquisition announcement (it goes up, of course):
screenshot-2017-01-17-19-07-24

Link

American Apparel sells for $103m, not including stores

I’m always amazed at how low IRL companies get valued. But: retail, manufactoring, and a history of funky management:

But fashion wasn’t the only thing to change; the retail business changed, too. The economic downturn was hard on the fashion industry as consumers cut back on spending. And brick-and-mortar stores have struggled as online retailers bite into their sales and target demographics. That can be especially harmful for brands like American Apparel, whose the business model is to open a bevy of stores and rely on foot traffic. “There are too many stores in too many places,” explained Cohen. “Everybody doing business in brick-and-mortar is migrating in some way, shape, or form to the internet. Everyone is seeing a chronic decline in the productivity of their real estate.”

It doesn’t include the stores:

All of this helps explain why the $88 million Gildan deal could be viewed as arguably the last great American Apparel marketing feat. Even with all its financial and legal woes, the company still attracted 12 bids. (Sources told Reuters that Amazon and Forever 21 were considering purchasing as well.) And while Gildan won’t be purchasing any of American Apparel’s 110 U.S. stores—which were also up for sale—the company was willing to pay nearly $90 million just for intellectual property and some equipment. That’s quite a feat given that the brand was built on the premise of selling such basic designs.

Still, that brand, tho.

Link

Autonomy quarter stuffing

When Autonomy was negotiating a sale to an end user, but couldn’t close the sale by quarter’s end, Egan would approach the resellers on or near the last day of the quarter, saying the deal was nearly done. Egan coaxed the resellers to buy Autonomy software by paying them hefty commissions. The resellers could then sell the software to a specified end user – but Autonomy maintained control of the deals and handled negotiations with the end user without the resellers’ aid. There’s no way these transactions could be revenue.

Link

The HPE hedging gambit

Some crisp HPE strategy coverage from Chris Evans at El Reg:

HPE is remaining part of the CSC and Micro Focus businesses by having a shareholding in the new organisations. It’s fascinating to think what this might mean going forward. It’s like neither business wants to fully commit to where future revenue for their business may lie. I say this because I can only assume that infrastructure sales will become a dwindling business as companies move to public cloud; it doesn’t seem to be enough that infrastructure alone will keep businesses buying on-site solutions.

And, a nice summing up of the HP master plan:

Effectively Meg Whitman is unravelling some of the bad decisions of the last few years, including the purchase of Autonomy and acquisition of EDS in 2008. There’s more focus on delivering infrastructure to clients, rather than moving revenue to services – remember HPE’s public cloud offering was also culled at the beginning of 2016.

The Register