Looks like the writing is on the wall.
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Some really good posts going on here.the shady acres accounting has been going on for a long time to keep "venture capital" chasing the o.g. carrot..i also think the economy is gonna take another downturn and this will only hurt wfm's credit card swiping customer base
Nice write up. Thanks.
(Continued) One reason why private investors might like a company is this: The target company has a big pile of equity (think of it like unspent money that the shareholders own) and very low debt. The private equity firm pays more than the company is worth (a premium), pays itself and the company's execs a big chunk of that cash, then uses a combination of borrowing and that stack of cash to spruce up stores, open new stores, close underperforming locations, hire and train people, open new distribution centers, research new products etc. Anyway the new owners do all sorts of things that are good for the business and should have been done all along, except for giving themselves and the execs at the time of the takeover a massive payoff. That's like a kickback if you ask me and it does load the company with debt. Ok, in the case of WFM, management uses a legal but aggressive accounting technique where capital leases (what it owes on stores and distribution centers) are treated like a utility bill instead of a capital investment. This reduces the assets on the balance sheet tremendously but also reduces stated liabilities and makes the equity balance look higher. It just does. That's accounting. This is why my theory is that a takeover will be a takeUNDER. Potential buyers of WFM know that the pile of cash (the equity) is really going to need to be tapped especially if growth and cash flows slow down...just to PAY THE RENT! Also the company is borrowing a billion dollars to spend on buying back shares and handing out stock options to execs. So that loads the company with more debt BEFORE a buyout...HELLO...Potential buyout partners don't like that very much! So that all gets discounted from the buyout price. What will a future privatized WFM look like? Here's my guess: More like a combination of Sprouts, Kroger, Wegmans, Publix, and the current Whole Foods. The current regional and corporate structure I imagine will be completely different. Much simpler and smaller. The $11/hour employee will be totally unaffected IF their store remains open. But the middle management and all those regional presidents and VPs? Look out. I imagine a smaller, leaner, way more focused company that focuses on key urban and suburban growth markets and gives up completely the idea that it needs to have a presence in every single state. That idea is expensive and ludicrous. I also envision a spinoff of UK operations to a licensed model. The owners over there would be like a franchisee. Anyway of course I don't have a crystal ball. One thing we see repeatedly is that no matter what, current execs tend to get a huge payoff in a buyout whether it's a takeover or a takeunder. So whether a buyer is willing to pay a 25% premium for the shares or scoops them up at a fire sale, it's heads I win tails you lose. One other possibility is that an existing retailer buys the company. I consider that unlikely because that company would be buying all the things that need fixing. Reorganizing and fixing things takes more money than building something from scratch or growing your existing comapny. Another possibility is that no buyer emerges and Wall Street and investors make their own long run judgement about what the shares are worth. For me, I would rather work for a small to medium company or other organization that is highly organized, offers real training and growth opportunity and that isn't in the retail grocery business. It's pretty cutthroat and getting tougher even for the ones who are REALLY good at it.
Hi 204183, No one can say exactly how any particular transaction will work. The terms are always different. But, a typical enough example in recent years was Dollar General. It was judged to be underperforming relative to its potential. (Those judgements come from a combination of financial analysis relative to competitors but also creativity -- the idea that "what if" this concept could be much bigger or just much better managed. Perhaps turnover was too high, customer service poor, facilities were old or safety compliance was a problem...or all of that.) Anyway a group of investors paid a 31% premium per share to acquire the company in 2007 and take it private (meaning shares no longer traded on Wall Street). It was a consortium of several different firms. Over the next few years the now-privatized Dollar General ended up closing 400 of the 8200 or so stores existing at the time of the buyout. That would equate to around 21 stores of 420 if it were the size of the current WFM. However the management looked carefully at the age of the stores and not just sales. They might have closed one old one and reopened two shiny ones close by if needed. Dollar General eventually went public again and the investors have enjoyed a huge payoff. No doubt top execs also got golden parachutes and/or cushy jobs. But go into any of the newer stores and they really are much nicer and more appealing. Undoubtedly it's meant more opportunity for those who have stayed, but as usual, the largest benefits went to the 1%. Continued next post.
This article is dated from last month. I read it when it came out. If you want current stuff just Google "wfm" or "wfm news". Things will likely be quiet until near the next quarter statement in February-- unless someone screws up again. I think they are just trying to get through the holidays without a scandal and hope that Wall Street forgets about it all next year.
203778, could you speak to what would happen to an average TM if a takeunder happens? I think it would GREAT if management were fired (THIS NEEDED TO HAPPEN ALL ALONG), but what would this look like for me? My store has had negative comps the last two years but I wouldn't guess it to be severely under-performing.
If it happens, I bet it will be a "takeunder" where the investment group pays LESS than the share price. Many people suspect the company's insiders fanned baseless rumors last year Publix buying WFM. It got investors excited and all for nothing because Publix doesn't need nor want this headache. They compete very effectively at a lower cost and can just open Greenwise stores right accross the street. If it happens, or actually WHEN it happens, it will be private equity that just wants the WFM name and will immediately consolidate the regions, fire the management and close the bottom 20% of all stores.. The problem is, WFM has (legally) obfuscated its debt by hiding capital leases (a form of long-term obligation) off the balance sheet. It makes debt/equity ratio appear to be lower. But sophisticated investors see right through that ploy. That is why I predict a "takeunder."
Good article.
It's so over.