Apollo in organic supermarket deal(3)

The sale of the two natural food chains may aid Whole Food’s planned merger with Wild Oats, which currently faces opposition from the FTC.

Austin, Texas-based natural food supermarket Whole Foods Market announced today its intention to sell all 35 store locations of Henry’s Farmers Market and Sun Harvest Farms, as well as a Riverside, California distribution centre to Los Angeles-based food retailer Smart & Final.

Smart & Final is privately held and controlled by private equity firm Apollo Management, which bought it in February of this year for $812.9 million. The firm, through Smart & Final and Smart Foodservice Cash & Carry, owns 255 non-membership warehouse stores selling food and foodservice products to household customers and small businesses.

Apollo is currently investing its sixth fund, which effectively has capital in excess of $12 billion (€9 billion). The firm has invested in retail and consumer businesses in the past, including Claire’s Stores, Linens ’n Things, Ralphs Grocery Company, and Dominick’s Supermarkets.

The Smart & Final deal will only go through if Whole Foods Market prevails in an ongoing lawsuit filed by the US Federal Trade Commission concerning Whole Foods Markets’ merger with Wild Oats Markets, and closes that merger.

Whole Foods and Wild Oats entered into a merger agreement on February 21, 2007. Whole Foods made a tender offer to purchase all the outstanding shares of Wild Oats markets at a purchase price of $18.50 per share in cash, plus assumed debt.

California billionaire Ron Burkle bought a 9.2 percent stake in Wild Oats in 2005 through his holding company Yucaipa Investment Group, which he increased to 17.3 percent in 2006. At the time of the increase, Yucaipa’s 13D filing stated that Wild Oats might engage with other persons or entities “regarding potential strategic transactions involving the company and other supermarket and retail companies.” Burkle, who has a history of shaping big grocery buyouts, has committed to supporting the deal.

On June 6, the FTC applied for an injunction to block the merger on the grounds that it would “substantially lessen competition and thereby cause significant harm to consumers.” The filing cited Whole Foods chief executive John Mackey’s own words in internal documents it obtained while reviewing the merger as evidence.

“By buying Wild Oats we will…avoid nasty price wars,” Mackey wrote. The sale would also allow Whole Foods to “eliminate forever the possibility of Kroger, Super Value, or Safeway using their brand equity to launch a competing national natural/organic food chain rival to us.”

By selling Henry’s and Sun Harvest, two grocers that specialize in natural and organic offerings, Whole Foods may be able to alleviate FTC concerns that it will wield monopoly power in that market should the merger with Wild Oats take place.