Whole Foods to Acquire Wild Oats; Quarterly Profit Falls 8%

Whole Foods Market on Wednesday said it has agreed to buy Wild Oats Markets for $18.50 a share in cash, or around $565 million, in a deal that would bring the natural and organic foods retailers together under one roof and help Whole Foods compete with larger grocers.

The news came as Whole Foods reported a 7.7% drop in quarterly earnings. Even though total sales rose, the company has seen much lower increases in sales at older stores while costs for health care and store openings are rising.

The offer is an 18% premium to its closing price on Wednesday. Whole Foods will also assume $106 million in debt.

Shares of Wild Oats Market jumped almost 17% in extended trade on Wednesday after Whole Foods made its offer. Whole Foods shares also rose in extending trading.

Wal-Mart Storesand Safewayhave both added more organic fare, and Whole Foods is also feeling pressure from niche retailers like privately held Trader Joe's and Wegmans.

"The growth opportunity in this category has led to increased competition from many players, most of whom are not dedicated natural and organic foods supermarkets, but are considerably larger than we are," Whole Foods Chief Executive John Mackey said in a statement. "The timing for our two companies to join forces could not have been better."

With the move, Austin, Texas-based Whole Foods will keep Wild Oats out of the hands of a traditional grocer, which could have used the chain's expertise in the organic and natural food market to compete against Whole Foods.

"Offense is the best defense," said Ken Harris of consulting firm Cannondale Associates. "They were either going to buy Wild Oats, or somebody else was going to do it."

Sales Up, Profits Down

Whole Foods reported after markets closed Wednesday that it earned $53.8 million, or 38 cents a share, in its fiscal first quarter, compared to a profit of $58.3 million, or 42 cents a share, a year earlier.

Sales rose 12% to $1.87 billion. Same-store sales, which tracks sales at stores open at least a year, rose 7% in the quarter, after rising 13% in the year-ago quarter.

In November, Whole Foods said it was pressured by traditional grocers adopting the fresh produce and prepared meals that are a cornerstone of its strategy.

At that time, CEO Mackey said fiscal 2007 would "be a transition year" for Whole Foods, and forecast same-store sales growth of 6% to 8%. The company on Wednesday reiterated that forecast, which was below the double-digit same-store sales increases it has posted for the last three years.

Whole foods has 191 stores in the United States, Canada, and the United Kingdom. Wild Oats has 110 stores in the United States and Canada.

Yucaipa Companies, a Los Angeles-based private equity firm where former U.S. President Bill Clinton serves as adviser, owns 15.2% of Wild Oats' shares.

Yucaipa, founded by billionaire grocery magnate Ron Burkle, focuses its investments on the supermarket and grocery industries.