Alanna Harding - Final Thesis - Fall 2017

THE PENNSYLVANIA STATE UNIVERSITY
SCHREYER HONORS COLLEGE
DEPARTMENT OF FINANCE
ACCRETION ANALYSIS OF THE AMAZON – WHOLE FOODS ACQUISITION
ALANNA ROSE HARDING

FALL 2017
A thesis
submitted in partial fulfillment
of the requirements
for a baccalaureate degree
in Finance
with honors in Finance
Reviewed and approved* by the following:
J. Randall Woolridge
Professor of Finance
Thesis Supervisor
Brian Davis
Professor of Finance
Honors Adviser
* Signatures are on file in the Schreyer Honors College.

i
ABSTRACT
The purpose of this paper is to analyze Amazon.com’s acquisition of Whole Foods
Market. More specifically, the paper will look to determine under what operating scenarios
Amazon will achieve an accretive outcome. This paper will look specifically at an accretion
dilution analysis sensitized to variety of financial operating cases. These operating cases will be
determined by the potential synergies associated with the transaction.
After going through this analysis, I expect to see accretion occurring when Amazon has
faster growing revenues, moderately declining gross margins, and significant operating expense
synergies.
ii
TABLE OF CONTENTS
LIST OF FIGURES ..................................................................................................... iii
LIST OF TABLES ....................................................................................................... iv
ACKNOWLEDGEMENTS ......................................................................................... v
Chapter 1 Overview ..................................................................................................... 1
A Brief Overview of Amazon.com & Whole Foods ........................................................ 2

Thesis Objective ............................................................................................................... 4
Chapter 2 Historical Review of M&A Deal Pricing .................................................... 5
Valuation Methods ........................................................................................................... 5

Synergies .......................................................................................................................... 8
Finding the Right Price .................................................................................................... 9
Chapter 3 Amazon Strategic Review ........................................................................... 12
Chapter 4 Whole Foods Strategic Review and Assessment ........................................ 15
Chapter 5 Review of Deal Structure and Timeline ...................................................... 18
Timeline of Events Leading to Sale ................................................................................. 18
Chapter 6 Overview of Media & Analyst Coverage of the Deal ................................. 23
Prime Pantry & Prime Fresh ............................................................................................ 23

Distribution ...................................................................................................................... 25
Cross Selling & Technology Development ...................................................................... 25
Supply Chain & Organic Credibility................................................................................ 26
Data 26
Naysayers ......................................................................................................................... 27
Chapter 7 Review of Amazon’s Initial Strategy Shifts ................................................ 29
Pricing .............................................................................................................................. 29
Traffic............................................................................................................................... 33
Prime Integration.............................................................................................................. 33
Other Changes .................................................................................................................. 34
Chapter 8 Methodology ............................................................................................... 35
Experience and Methodology Preface.............................................................................. 35

Overarching Model Assumptions .................................................................................... 35
iii
Amazon.com Operating Model Assumptions .................................................................. 36

Whole Foods Market Operating Model Assumptions...................................................... 40
Transaction Assumptions ................................................................................................. 44
Case Methodology ........................................................................................................... 46
Chapter 9 Case Analysis and Accretion Output .......................................................... 48
Accretion Output .............................................................................................................. 50
Chapter 10 Conclusion ................................................................................................. 54
Appendix A Acquisition Synergy Cases..................................................................... 55
Appendix B Yearly Accretion or Dilution .................................................................. 56
BIBLIOGRAPHY ........................................................................................................ 57
iv
LIST OF FIGURES
Figure 1. Public Market Information ....................................................................................... 1
Figure 2. Public Market Reactions to Whole Foods Acquisition............................................. 2
Figure 3. Amazon Share Price ................................................................................................. 13
Figure 2. Share Reactions in the Month Surrounding the Announcement............................... 18
Figure 5. Whole Food Share Price ........................................................................................... 21
Figure 6. Change in Price at Whole Foods Location ............................................................... 30
Figure 7. Competitive Price Landscape ................................................................................... 31
Figure 8. Changes in the Food Prices Industry Wide .............................................................. 32
Figure 9. Amazon.com Wall Street Research Estimates ...................................................... 38
Figure 10. Amazon Operating Model Summary ...................................................................... 39
Figure 11. Whole Foods Market Wall Street Research Estimates ........................................ 41
Figure 12. Calenderization ....................................................................................................... 42
Figure 13. Whole Foods Market Operating Model .................................................................. 43
Figure 14. Debt Issuance and Sources and Uses ...................................................................... 45
Figure 15. New Goodwill Calculation ..................................................................................... 46
Figure 16. Combined Income Statement.................................................................................. 47
Figure 17. Case Outline ........................................................................................................... 49
Figure 15. Total Accretion for Each Case................................................................................ 50
Figure 19. Case 1 ..................................................................................................................... 51
Figure 20. Case 2 ..................................................................................................................... 51
Figure 21. Case 3 ..................................................................................................................... 51
Figure 22. Case 4 ..................................................................................................................... 52
Figure 23. Case 7 ..................................................................................................................... 52
Figure 24. Case 8 ..................................................................................................................... 52

v
Figure 25. Case 18 ................................................................................................................... 52
Figure 26. Case 19 ................................................................................................................... 53

vi
ACKNOWLEDGEMENTS
I would like to thank Dr. Woolridge for his support and guidance throughout (and before)
my career at Penn State. I would also like to thank Dr. Davis for his support, mentorship, and
feedback throughout this process.
Most importantly, I would like to thank my family: Karen, Tony, and Amanda for their
persistent encouragement. Finally, I would like to dedicate this thesis to the memory of Joseph
Harding – whose support of my academic endeavors has pushed me to where I am today.

1
Chapter 1
Overview
On June 16th, Amazon.com1 announced that it would purchase Whole Foods Market2 for a total
of $13.7 billion3. This all-cash transaction valued the company at $42.00 per share, representing a
~27.00% premium to where shares were trading at the prior day’s close4. The transaction closed on
Monday, August 28th and the companies have been operating as a joint entity since.
Figure 1. Public Market Information

Transaction Key Details
Announcement Date 6.16.2017
Closing Date 8.28.2017
Offer Price $42.00
Transaction Value $13.7 billion
Key Statistics Amazon.com Whole Foods
Market Capitilization $460,873 $10,540
Share Price (6.15.2017) 964 33
2016 Revenue (Year End Dec) 135,987 16,711
2016 Net Income 2,371 471
This acquisition sent shockwaves through the grocery store industry as well as the broader retail
market. While this might seem dramatic, Amazon’s acquisition of a traditional retailer in a highly
competitive space meant that Amazon was going to truly invest itself in reinventing the grocery store
concept and brick and mortar retail more broadly. An observer can easily tell that this is Amazon’s
intention simply by looking at Amazon.com’s history as a company.
1
Amazon.com will be referred to as Amazon.com, Amazon, AMZN, the acquirer, or the company
throughout this paper.
2
Whole Foods Market will be referred to as Whole Foods Market, Whole Foods, WFM, the target, or the
company.
3
“Amazon to Acquire Whole Foods Market.” Amazon to Acquire Whole Foods Market, Amazon Investor
Relations, 16 June 2017. Accessed 28 Aug. 2017.
4
Turner, Nick, et al. “Amazon to Acquire Whole Foods for $13.7 Billion.” Bloomberg.com, Bloomberg,
16 June 2017. Accessed 28 Aug. 2017.
2
Figure 2. Public Market Reactions to Whole Foods Acquisition
Grocery Industry Peer Set Price Reactions

$130.00
$120.00
$110.00
$100.00
$90.00
$80.00
$70.00
$60.00
$50.00
$40.00
Kroger Co. Sprouts Farmers Markets, Inc.

Natural Grocers by Vitamin Cottage, Inc. Ingles Markets, Incorporated Class A
Weis Markets, Inc. SUPERVALU INC.
Smart & Final Stores, Inc. Village Super Market, Inc. Class A
Costco Wholesale Corporation
A. A Brief Overview of Amazon.com & Whole Foods
1. Amazon.com
A serial disruptor, Jeffery Bezos (“Jeff”) founded Amazon.com as an online book store on July 5,
1994, in Seattle, WA. Bezos with a background in computer science, graduated Princeton and went to
work for a startup after college but eventually found his way to D.E. Shaw, a hedge fund where he
worked until he founded Amazon.com.5
5
Hartmans, Avery. “The fabulous life of Amazon CEO Jeff Bezos, the second-Richest person in the
world.” Business Insider, Business Insider, 15 May 2017.
3
Bezos described his company as the “Earth’s biggest bookstore” and used major book distributors
and wholesalers to fulfill orders during the early days. Within two years of founding – Bezos was selling
over 2.5 million books online and sold ~$150 million worth of books. Having already developed a
thriving online book store, Bezos shifted his attention to selling all sorts of products and then began
developing products of its own such as the Amazon Kindle and the Amazon Fire Stick. While retail is the
bread and butter of the Amazon business, it is not in fact the profit center. The final key part of Amazon’s
business is its web services platform is a cloud computing offering which initially started from selling
Amazon’s excess capacity that they had built internally.6 Today Amazon operates in almost every
consumer facing market imaginable – retail, entertainment, technology, grocery, food delivery, pet, autos,
and the list continues.
2. Whole Foods Market
Like Amazon, Whole Foods Market was a revolutionary business at one point during its life
cycle. Whole Foods Market on September 20, 1980, in Austin, TX. The store concept was founded by
John Mackey, Renee Lawson Hardy, Craig Weller and Mark Skiles who were four local business men
that there was a need for natural food supermarket concept as there was only ~6 natural food
supermarkets at the time. Starting in 1984 the company began expanding into Houston, Dallas, and New
Orleans and underwent a series of acquisitions that helped the company scale to a national degree.7 Whole
Foods Market is a disrupter in this space as it truly created the market for a natural and organic super
market. The company filled a void in the market, just as Amazon did in online retail.
6
7
Whole Foods Market History.” Whole Foods Market.
4
B. Thesis Objective
This paper will take a look at the transaction from a qualitative perspective with the goal of using
that qualitative data to determine appropriate synergy expectations. From that point, the paper will build
out different operating cases for the combined company in order to determine the accretion or dilution
that would occur under different scenarios. After looking at this analysis, it will be possible to determine
what operation changes Amazon should implement to achieve accretive results. For the purposes of this
analysis, the paper will assume that Amazon cares that this acquisition is accretive.
In order to determine the accretiveness of this deal, this paper will first look at studies examining
whether or not deals are typically accretive for the acquirer and will look at how M&A transactions are
typically priced.
Armed with this understanding, this paper will then examine Amazon and Whole Foods as
standalone entities. This background knowledge helps explain why Whole Foods was a target for a
takeover and why Amazon’s disruptive process in retail is primed to optimize Whole Foods.
In chapter 5 the paper will examine the deal terms and the timeline that lead to the deal
announcement and then in chapter 6 the paper will examine coverage of the deal in the media and
amongst research analysts. In chapter 7, the paper will examine the changes made by Amazon to the
Whole Foods business in order to build these changes into the operational cases examined in the accretion
analysis found in chapter 9. On the way towards this accretion analysis in chapter 9, chapter 8 will
examine the methodology behind the model implemented in this paper.

5
Chapter 2
Historical Review of M&A Deal Pricing
In order to analyze the Amazon – Whole Foods transaction, it is critical to gain an understanding
of how companies are valued in the purchasing process and to consider the realities of the transaction as
captured by news outlets and research firms.
When considering an M&A transaction there are two metrics that are usually considered from the
start – the price of an acquisition and the expected synergies. Both of these elements directly feed into the
accretion or dilution of any given transaction. The expected synergies also directly feed into the price that
a given acquirer is willing to pay. Throughout this literature review, the paper will examine how
transactions prices are determined as well as how expected synergies are calculated.
1. Acquisition Price
There is a great amount of analysis surrounding prices; however, despite this focus on price,
Varaiya and Ferris, the authors of “Overpaying in Corporate Takeovers: The Winner’s Curse,” make the
case that 67% of acquirers paid too much for a target in the 1980’s.8 The authors point to the fact that
paying too much can lead to disappointing post-merger performance and sometimes corporate bankruptcy
which justifies the hyper-focus that is placed upon purchase price. Companies are enticed to offer overly
generous premiums because of the allure of potential synergies that could exist between the two
companies and due to anchoring bias when determining offer prices.
A. Valuation Methods
It is critical to understand how prices are assigned in the M&A process. Eccles et. All offer a
comprehensive look into how companies are valued in the deal making process. The intrinsic value
8
Varaiya, Nikhil P., and Kenneth R. Ferris. “Overpaying in Corporate Takeovers: The Winner’s Curse.”
Financial Analysts Journal, vol. 43, no. 3, 1987, pp. 64–70.
6
method, market value method, purchase price, synergy value, and the value gap analysis are the
methodologies referenced in the aforementioned Harvard Business Review article.9
1. Intrinsic Value Method
The intrinsic value method typically takes the form of a discounted cash flow analysis. The
discounted cash flow analysis attempts to ascertain the cash flows of the business and then discounts them
to account for the time value of money. This valuation methodology is perhaps the most widely used
method to determine what a company is worth today. With a knowledge of how much a business might be
worth today, an acquirer can determine how much to pay for a company before taking into account the
synergies that might be possible.
2. Public Comprables Method
Public comparables is a market valuation method that can also be used to determine the value of a
business that is up for sale. Under this method, one would look at the market average multiple for a given
metric to determine the multiple that should be assigned to the business in question. For example, to value
the retailer Kohl’s, one could look at the average price to earnings ratio for the peer set including
companies such as Macy’s, Target, DSW, Sears, Bon-Ton. Then one could multiply the average price to
earnings multiple by the earnings per share metric for Kohl’s to determine a share price for Kohl’s.10
3. Precedent Transaction Analysis
Precedent transactions analysis is another common methodology mentioned in the acquisition
pricing process. In an article describing precedent transactions on Investopedia, Brent Radcliffe, describes
the process as using publicly available information to approximate the financial multiples paid for
transactions that feature a similar acquirer and similar target.
However, there is controversy about how to think about the precedent transaction process. In an
article that appeared in the Harvard Business Review, Clayton Christensen makes the argument that there
9
Eccles, Robert G. , et al. “Are You Paying Too Much for That Acquisition?” Harvard Business Review,
21 Aug. 2014. Accessed 12 Sept. 2017.
10
“Valuation Techniques Overview.” Street Of Walls.
7
are two reasons to purchase a company, both of which should be approached in different ways.10 One
reason is to boost a company’s performance by holding onto a premium market position or cut costs and
the other is to alter the trajectory of the company.10 A game changing acquisition, according to
Christensen, is one that is more likely to surprise investors and deliver immense returns even though these
targets are hard to identify and price.11
Christensen indicates that sometimes the new parent company can plug in certain elements of the
target’s business model into the parent’s model, such as the supply chain, or can choose to operate the
acquisition as a standalone entity, or use it to reinvent the existing business model.10 Of the options
presented by the authors, the Amazon – Whole Foods transaction represents the reinvention type deal.
Amazon intends to reinvent its grocery business strategy through the Whole Foods system – integrating
supply chain elements and Amazon technology into brick and mortar retail stores, and incorporating
Amazon Pick Up Lockers.
Christensen finds that companies typically underpay for targets that “re-invent” their business
model and overpay for ones in which they plan to leverage the business model of the target.10 When using
precedent transactions for business models that will be leveraged, you can simply look at average
purchase multiples; however, this same methodology will make revolutionary deals seem overpriced.10
When preforming precedent transaction analysis for revolutionary business purchase, analysts should be
looking at deals with a similar consequence rather than a similar business.11 When making business
purchases, the “right price” can only be determined by the buyer since the purpose of the acquisition will
determine how to evaluate the business.12
Further in this paper, when examining the other bidders in the Whole Foods process, this idea of
companies having different values to different bidders, explains why Kroger or Walmart did not make a
11
Christensen, Clayton M, et al. “The Big Idea: The New M&A Playbook.” Harvard Business Review,
Mar. 2011, Accessed 4 Sept. 2017.
12
Christensen, Clayton M, et al. “The Big Idea: The New M&A Playbook.” Harvard Business Review,
Mar. 2011, Accessed 4 Sept. 2017.
8
counter bid for Whole Foods Market. Whole Foods was not worth as much to these companies as it was
worth to Amazon because Whole Foods would have simply been an add-on to their businesses rather than
a transformative component to their strategy. This approach to precedent transactions is unique within the
literature for deal pricing and serves as an interesting guide to thinking about the Amazon.com and Whole
Foods transaction.
4. Reference Points
However, not all pricing follows these methods and not all deal prices are rationale. In a paper
entitled, “A Reference Point Theory of Mergers and Acquisition,” Malcolm Baker, Xin Pan, and Jeffrey
Wurgler make the case that psychological reference points have an impact on the valuation, deal success,
market reaction, and merger waves. Throughout the paper, the authors make the case that the 52-week
high and the most often occurring price are arbitrary, but are still highly focused upon when determining a
transaction price. Realistically, the chance of an offer being accepted increases dramatically when the
offer price exceeds the 52-week high. Throughout this study, the authors found that when the offer price
exceeds the 52-week high, the odds of the bid being accepted is 3% - 4% more likely. At the same time,
the acquirer’s shareholders react negatively as the bidder offers a price closer to the 52-week high.13 The
authors also found that M&A activity rises when markets are at highs as many companies will be at 52-
week highs and therefore target companies can justify selling themselves for a “fair price.”13
B. Synergies
However, it is not just these psychological factors that determine prices. Synergies are also used
to determine how much a company should pay to acquire another. These synergies come in different
shapes and sizes, mainly cost and revenue synergies. Cost synergies are considered to be “hard synergies”
13
Baker, Malcolm, et al. “A Reference Point Theory of Mergers and Acquisitions.” 2009
9
due to their more concreate and achievable nature.14 Assuming that the two respective businesses report
costs in the same way, it can be fairly straight forward to determine what costs can be cut once the
companies have been combined. More complicated to estimate however, are revenue synergies which
involve estimating the behavior of customers. An example of a revenue synergy is cross selling the
products of company A and B to the respective clientele of the WholeCo.14 The other major type of
synergy is process improvements which involves taking the processes and technology from each company
and bringing them together to create one better method for anything.14 An example of this type of synergy
would be if Uber were to purchase Lyft to buy their superior user interface and integrate that into the
Uber platform. Another more niche synergy involves financial engineering which is derived from taking
on debt to buy a company or using the combined balance sheet of the two companies to take out debt to
fund business operations or perform share buy backs.14 Finally, another type of synergy is tax engineering
with the goal of avoiding onetime tax costs or creating a blended tax rate that is lower than the standalone
acquirer.14
C. Finding the Right Price
Now, having reviewed both pricing dynamics and the types of synergies that exist in transactions,
how can a shareholder tell if the acquirer paid too much?
When answering this question and evaluating potential overpayment, integration risk must be
considered. Elvis Picardo, an author for Investopedia, explains that overpayment risk is one of the main
forms of integration risk. These integration risks include a company not being able to capitalize on
desired synergy targets, a culture clash from integrating two corporate cultures, and from overpayment.
This overpayment risk can come from over optimism regarding best-case synergy scenarios. Both of these
14
10
can lead to large financial losses in the future related to write downs of good will and the negative effects
of over-levering.15
Synergies are commonly used to justify large premiums and controversial deals made by
companies. However, in her paper, “How Much is the Company Worth,” Pamela Haunschild speaks
extensively about the role that synergies and competition play in the pricing of acquisitions. In her paper,
she makes the case that there is little evidence that synergies truly drive the price of an acquisition.16
Instead, she makes the case that a better determinant of price is the number and type of competitors
bidding for a business.16 Bidding wars can create irrational exuberance and the desire to win a bidding
war can lead to an acquirer overpaying for an acquisition.16
While this idea of overpayment seems to be a fairly straight forward concept, it is not universally
accepted that big premiums can lead to big issues. In a Harvard Business Review article titled, “Are You
Paying Too Much for that Acquisition,” the authors make the case that the size of the premium does not
have a linear relationship with the success of the deal from a financial perspective.17 The authors of this
article make the case that the price of the acquisition and the premium do not entirely matter – instead
what’s important is that the acquirer knows what the target is worth to them. One company can pay a
large premium – because of large synergies specific to the tie up that can back the premium.17 This
however is a very difficult task as the authors found that well over half of mergers in the study of 131
deals between 1994 and 1997 failed to create there expected values – meaning that the acquirer paid more
than the acquisition was truly worth to their company.17 It is interesting to note, that the ideas put forth in
this HBR contradict the idea that paying more than a 52-week high for a company is a signal for
overpayment. Eccles makes the case that it is completely relative based on the acquirer.
15
Picardo, Elvis. “How Mergers and Acquisitions Can Affect A Company.” Investopedia, 29 Oct. 2014.
Accessed 23 Sept. 2017.
16
Haunschild, Pamela R. “How Much is That Company Worth?: Interorganizational Relationships,
Uncertainty, and Acquisition Premiums.” Administrative Science Quarterly, vol. 39, no. 3, 1994, p. 391.,
doi:10.2307/2393296.
17
11
All of this serves to answer the question, that the authors of the paper “Do Mergers and
Acquisitions Create Value to Shareholders? New Evidence from US Mergers” pose. Paskelian et al. make
the case that despite the noise in the academic research, there are three questions that an observer needs to
ask to determine M&A value creation.
1. Do target shareholders receive outsized returns from a transaction?
2. Does the acquirer shareholder’s achieve any value from M&A tender offers?
3. Do acquirers achieve positive returns?18
The first question has been answered throughout the body of M&A research. For completed transactions,
shareholder’s of companies that are offered a premium for the purchase of their company achieve
outsized returns.18 The next two questions are much more ambiguous and depend on the success of the
transaction. Throughout the course of the paper, the authors found that between 2009-2012, companies
that paid in cash for acquisitions were more likely to see a positive return. These acquisitions aligned
themselves with “value enhancing characteristics.”18 These all cash, value enhancing deals led to a
0.293% return for the bidders’ shareholders around the two-day event window. These types of deals also
had long term abnormal returns of 1.368% and 2.125% over six month and one year period.18
18
1. Paskelian, Ohaness George, and Stephen Bell. “DO MERGERS AND ACQUISITIONS CREATE
VALUE TO SHAREHOLDERS? NEW EVIDENCE FROM US MERGERS.” The Global Journal of Finance and
Economics, vol. 12, no. 1, 2015, pp. 33–43.
12
Chapter 3
Amazon Strategic Review
Since its founding, Amazon has been on a meteoric rise to the top, driven by excellent execution
on a strategic vision and intense reinvestment in growth. The company’s vision as defined by the founder
of Amazon, Jeff Bezos, is “to be earth's most customer-centric company; to build a place where people
can come to find and discover anything they might want to buy online."19
Amazon executes on this vision of being the most consumer centric company every day that a
new news story pops regarding a new industry that Bezos has targeted. Per Bylund, a contributor for
Entrepreneur.com, claims that Amazon’s success comes from the company’s customer first focus driven
by three steps.20 First Amazon figured out what their customer’s craved - quick delivery. Next, they
determined how to overcome challenges that competitors faced which led to customer frustration (i.e.
difficult returns, slow delivery, and limited availability). Lastly, they aimed to satisfy every single
customer.20
Amazon’s business is not wildly creative or innovative, but instead they derive their success from
their ability to leverage their core competency, their supply chain, into a variety of business, to serve the
needs of a customer.20 Once Amazon had the supply chain for the delivery of books in place, the company
was able to pivot into an ecommerce juggernaut using its network to sell all sorts of products.
The second element of the company’s mission statement – “to build a place where people can
come to find and discover anything they might want to buy online,” drives another piece of the
company’s success. Amazon is unwilling to stand still. Tom Popomaronis, a contributor for Forbes,
makes the case that the company’s success is attributable to the fact that it never allows itself to get
comfortable. Amazon is always pushing to leverage their platform into new markets and finding new
19
Farfan, Barbara. “What is Amazon.Com's Mission Statement?” The Balance, 20 Mar. 2017.
20
Bylund, Per. “Amazons Lesson About Disruption: Rattle Any Market You Can.” Entrepreneur, 29 Aug.
2017.
13
areas to disrupt. Bezos and his team are seemingly always looking to make the platform more compelling
and able to offer anything that a consumer might want to buy online.21
While the commitment to the company’s strategy is impeccable, Amazon’s vast growth would
not have been possible without willing equity and debt investors in the business. Since the Company went
public on May 15, 1997, the company has enjoyed significant appreciation with the exception of three
major periods: the tech bubble of the early 2000s, the financial crisis, and late 2013. With the exception of
these three periods, the rise of Amazon has been dramatic with an appreciation of +58,000% since its
IPO. An investor would expect dramatic stock price appreciation like that to accompany dramatic profit
levels – however, Amazon did not report a full year profit until 2004 and still posts inconsistent earnings
to this day. However, there has been no sustained shortage of demand for shares of Amazon.
Figure 3. Amazon Share Price
Amazon Share Price

$1,200
$1,000
$800
$600
$400
$200
$0
5/1997 10/1999 4/2002 10/2004 4/2007 10/2009 4/2012 10/2014 4/2017
Jon Markman, a contributor for Forbes, makes the case that sometimes profit isn’t the most
important element for investors, which is what has allowed Amazon to thrive and appreciate to incredible
levels. Sometimes investors will buy into a company due to its vision and story which is exactly why
individuals and institutions that have been willing to invest in Amazon across the capital structure.22 This
21
Popomaronis, Tom. “The Inexorable Rise of Amazon: Nine Reasons Why It’ll Only Get Bigger.” Forbes,
Forbes Magazine, 4 Aug. 2017.
22
Markman, Jon. “The Amazon Era: No Profits, No Problem.” Forbes, Forbes Magazine, 23 May 2017.
14
willingness to invest has given Amazon access to highly affordable debt which has led to the ability to
“experiment patiently, accept failures, plant seeds, protect saplings, and double down when [they have
seen] customer delight.”23
Matthew Yglesias, an author for Slate, points to the fact that Amazon is “constantly [sacrificing]
short-term profit in the interest of serving other constituencies… including customers, employees, and the
community.” With the trust of investors, Amazon has been able to continue to thrive and invest in the
long term because investors have, to this point, trusted management to invest their capital wisely.24
Yglesias claims that investors are lending this trust based on the belief that Amazon will eventually gain
“monopoly pricing power” and start significantly raising prices.
23
Markman, Jon. “The Amazon Era: No Profits, No Problem.” Forbes, Forbes Magazine, 23 May 2017.
24
Yglesias, Matthew. “Amazon Is a Great Company Because It Has the Most Generous Shareholders in the
World.” Slate Magazine, 12 Dec. 2012.
15
Chapter 4
Whole Foods Strategic Review and Assessment
By taking a glance at any major research report about Whole Foods over the last year, an observer
would have seen a very grim picture emerge. For example, analysts at CFRA highlighted some of the
issues facing Whole Foods including falling comparable store sales which were declining at a rate of
2.2% throughout the full year 2017 as well as slowing square footage growth.25 On a quarterly basis, same
store sales had fallen for six straight quarters before the acquisition was announced. While CFRA
expected WFM to be hurt by increased competition, they expected this issue to be partially offset by
aggressive price investment and more marketing spending in the second half of the year.
While Whole Foods was the whipping boy of Wall Street through 2017, this was not always the
case. In fact, the company was once a darling of investors. Whole Food’s success really began during a
three year “buying spree” during which Whole Foods acquired several major regional grocery chains and
established their natural and organic strategy that included pushing healthy foods that people actually
wanted to eat.26
In addition to successfully timed acquisitions, Whole Foods rise was driven in the 1980 – 2010 by
opening stores in the right places at the exact right time. These right places were upscale neighborhoods
where baby boomers and millennials were able to pay high prices for the company’s organic and natural
food product.27
Management’s timing was perfect and so was the beautifully crafted stores focused on creating an
excellent experience for consumers. These sprawling stores featured on-site bakeries, kitchens, and bright,
open floor plans. The carefully crafted experience was designed to increase impulse shopping and
25
Agnese, J. “Whole Foods Market Inc.” CFRA Research, CFRA Research, 26 Aug. 2017.
26
Waxman, Olivia. “Amazon Buying Whole Foods: How Whole Foods First Made It Big.” Time, Time, 16
June 2017.
27
Mourdoukoutas, Panos. “Two Problems With Whole Foods' Business Model.” Forbes, Forbes Magazine,
12 Feb. 2017.
16
therefore sales in stores.26 In fact, former co-president and co-COO Walter Robb stated that “Shopping is
60% impulse, so [if] food is presented in a beautiful and exciting way, that… becomes part of the
experience.”28 Overall the company built a differentiated platform by focusing on product mix, customer
service, and a store environment that is meant to appeal to high end, health conscious customers.29
However, the story in 2017 is much different. Before Amazon came into the picture, Whole Foods
was a dog of Wall Street with two problems: increased competition and market saturation.30 Whole Foods
faced competition from Wal-Mart and Kroger who entered into the natural and organic area with lower
cost offerings. By offering lower prices, competitors were able to capture Whole Foods consumers that
were not brand loyal and would accept somewhat lower quality for a lower price point. However, Whole
Foods wasn’t just facing competition for customers, there same stores entering into the market were
competition to purchase from a limited number of natural and organic suppliers. In summary, new natural
and organic market entrants were competing with Whole Foods to buy goods from suppliers and then
using those goods to undercut Whole Foods with consumers to gain attempt to steal market share.
For a period of time it seemed that Whole Foods would just stick with its tried and true strategy
but after the store continued to lose market share to upstarts such as Trader Joes’ and industry veterans
such as Wal-Mart, a change was necessary. However, while price was clearly the main point of
contention for consumers, Whole Foods was somewhat handcuffed from solving the issue. If the
company were to lowering product prices, at a certain point they would be forced to offering lower
quality products which would alienate the core customer base of the store, less price sensitive consumers
that were willing to pay higher prices for premium products. These premium shoppers would go to the
more pure play Whole Foods competitors such as The Fresh Market and Sprouts Farmers Market. The
28
Waxman, Olivia. “Amazon Buying Whole Foods: How Whole Foods First Made It Big.” Time, Time, 16
June 2017.
29
Agnese, J. “Whole Foods Market Inc.” CFRA Research, CFRA Research, 26 Aug. 2017.
30
Mourdoukoutas, Panos. “Two Problems With Whole Foods' Business Model.” Forbes, Forbes Magazine,
12 Feb. 2017.
17
company’s flawed solution was to create a new store format and borrow from the success of Trader Joes’.
The management team created Whole Foods 365.
When creating this concept, Whole Foods attempted to catch up with the evolving priorities of the
US grocery shopper. Hayley Peterson, a contributor for Business Insider, identified these priorities as an
increased desire for convenience and better prices. Peterson notes that Whole Foods was not traditionally
known for either of these factors, considering the sprawling 40,000 square foot traditional layout and the
company’s premium positioning. With the Trader Joes’-esqe smaller store format, Whole Foods 365
concept, management attempted to target a lower price point by focusing on prepared and packaged foods
and by offering more private label offerings. The smaller, no frills footprint was intended to lower
overhead costs offset the impact of lower prices. This strategy however, was never considered to be a
homerun due to the potential for cannibalization of legacy Whole Foods stores. The strategy was to
maintain their higher end customer in the legacy store format and re-capture the more price sensitive
consumer at Whole Foods 365. However, before the acquisition, this concept was still in development
with only a handful of stores positioned throughout the company.
In summary – Whole Foods, the once market leading national natural and organic grocer, lost its
competitive edge and failed to evolve to keep pace with what consumers wanted: convenience and good
prices.
18
Chapter 5
Review of Deal Structure and Timeline
On June 16th, Amazon.com announced that it would purchase Whole Foods Market for a total of
$13.7 billion.31 This all-cash transaction valued the company at $42.00 per share, representing a ~27.00%
premium to where shares were trading at the prior day’s close.32 Amazon.com financed the transaction
with a combination of debt and cash on hand – with Goldman Sachs, financial advisor to Amazon.com,
and Bank of America Merrill Lynch offering a year-long bridge loan facility worth the entirety of the
transaction value.33 If Whole Foods chose to enter into a different transaction, WFM would have paid a
$400 million break fee.34 The transaction closed on Monday, August 28th and the companies have been
operating as a joint entity since.
A. Timeline of Events Leading to Sale
Figure 4. Share Reactions in the Month Surrounding the Announcement

Amazon.com vs. Whole Foods Share Price
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
5/23 5/30 6/6 6/13 6/20 6/27
Whole Foods Amazon.com
31
32
33
Mackey, John , and Gabrielle Sulzberger. Whole Foods Market: Schedule 14A. 21 July 2017.
34
19
Throughout the spring and summer of 2017, Whole Foods Market attempted revitalize its board
and management structure in the interest of improving the company’s same store sales and profitability.
Before April 2017 – Whole Foods had engaged in “board refreshment efforts” in order assess
industry changes and position the company to perform well in a dynamic marketplace.35
April 10, 2017 – JANA Partners (“JANA”), a hedge fund based in New York City, filed a 13-D
indicating that the fund had acquired around 8.8% of Whole Foods Market Stock (Mackey and Sulzberger
26). In its 13-D filing JANA indicated that they wanted to see a change in the composition of the board of
directors and senior management team, discuss real estate optimization strategies, and how to fix “core
operating deficiencies” such as customer loyalty.36 The filing also indicated that JANA wanted Whole
Foods to pursue strategic alternatives.
April 17, 2017 – Whole Foods hired Evercore Group LLC (“Evercore”) to serve as its financial
advisor in dealings with JANA.35
April 18, 2017 – Whole Foods management was approached by an industry participant (“X”)
expressing interest in pursuing a partnership or strategic opportunities. Industry participant X wanted to
meet to discuss options.35
Between April 20 & May 4 – Four different private equity firms expressed interest in pursuing a
leveraged buy-out or a private investment in public equity (PIPE) but no concreate proposals were
offered.35
April 21, 2017 – An outside consultant made a call to Jay Carney, Amazon.com’s Senior Vice
President of Corporate Affairs, to inquire about a meeting with Amazon.com executives to discuss
strategic alternatives for Whole Foods.35
April 30, 2017 – Amazon.com and Whole Foods CEOs met for a preliminary discussion about a
potential partnership.35
35
McGrath, Maggie. “Whole Foods Shares Spike As Activist Jana Partners Takes 9% Stake.” Forbes,
36
Forbes Magazine, 10 Apr. 2017. Accessed 10 Sept. 2017.

20
May 8, 2017 – Whole Foods received interest from another industry participant (“Y”) who
wanted to engage in a supply based partnership.35
May 10, 2017 – Whole Foods Market released second quarter earnings, reporting the addition of
five new independent directors and a new CFO, Keith Manbeck. The company reported EPS of $0.37 per
share vs. expectations of $0.37 per share on revenues of $3.74 billion vs. expectations of $3.73 billion.
Same store sales for the quarter declined 2.8% which represented a decline that was less than expected.
The market reacted positively to the announcement but this announcement represented the 7th straight
quarter of same store sales declines.37
May 16, 2017 – The industry participant X met with Whole Foods management to propose a
merger of equals transaction between the two companies with a per share value in the range of $35 - $40.
The transaction would have included a large amount of debt with a stock component as well.38
May 18, 2017 – Whole Foods management a discussed potential supply arrangement with
industry participant Y.38
May 23, 2017 – Amazon.com offered $41.00 per share for Whole Foods common stock subject
to “due diligence, satisfactory documentation, and final board approval.”38
May 25, 2017 – Goldman Sachs, financial advisor to Amazon.com, spoke with management of
Whole Foods to indicate that their client was uninterested in participating in a multi-firm bidding
process.38
May 30, 2017 – The Board of Directors of Whole Foods met in New York to discuss the existing
offers and opportunities. Evercore indicated that the offer from Amazon.com was likely higher than a
private equity firm could be expected to pay and still achieve the customary returns. The Board of
Directors instructed Evercore to make a counter offer of $45.00 per share to Amazon.com.38
37
Whitten, Sarah. “Whole Foods shares pop on in-Line earnings, new board members.” CNBC, CNBC, 11
May 2017. Accessed 11 Sept. 2017.
38
21
June 1, 2017 – Amazon.com countered with an offer of $42.00 per share and indicated that it
would move on with different alternatives if Whole Foods did not accept this offer quickly.38
June 2, 2017 – The Board of Directors unanimously approved Evercore to move forward with the
$42.00 per share bid with Amazon.com.39
June 14, 2017 – CEO of Whole Foods, John Mackey, stated in an interview that JANA was full
of a bunch of “greedy bastards” who distribute negative propaganda about Mackey and Whole Foods in
the interest of forcing a sale of the business.40
June 15, 2017 – The parties executed the merger agreement and the deal was announced via
press release on June 16, 2017.39
June 16, 2017 – Upon the announcement of this transaction, the share price of Whole Foods
Market traded to ~$43.00 above Amazon.com’s offer price of $42.00 per share.
Figure 5. Whole Food Share Price
Whole Foods Share Price

$44
$42
$40
$38
$36
$34
$32
6/1/2017 6/8/2017 6/15/2017 6/22/2017 6/29/2017
Source: Factset Data as of 9.28.2017
This trading pattern was driven by the fact that many analysts felt that there could be another
offer for Whole Foods. However, with the timeline of events now visible it can be seen that Whole Foods
was engaging with other potential buyers and partners but in the end Amazon’s offer was the most
compelling. Amazon was able to make a compelling offer because this was a transformative transaction
39
Thomas, Lauren. “Whole Foods CEO John Mackey calls activist investor Jana 'greedy bastards'.” CNBC,
40
CNBC, 14 June 2017. Accessed 10 Sept. 2017.

22
for the Amazon grocery business but would be a more traditional acquisition for other grocers or private
equity firms as was previously explained by Clayton Christensen in his article for the Harvard Business
Review.
In addition to this, Amazon had more financial fire power than many industry competitors but
also had more motivation based on the potential synergies that Amazon’s management team could see.
These potential synergies are the topic of discussion in the next chapter.
23
Chapter 6
Overview of Media & Analyst Coverage of the Deal
With Amazon attached to the transaction, there was no doubt that the financial press and research
analysts would offer a great deal of coverage on this transaction. The potential rationale and synergies for
Amazon are outlined in depth across the coverage and are important to consider for the purposes of this
paper as they are the drivers of the financial assumptions used to determine different accretion or dilution
scenarios for the deal.
A common theme throughout much of the coverage is Amazon’s development of a physical
presence. Through its online strategy, Amazon has truly revolutionized the ways that consumers shop and
added a convenience factor that traditional retailers have struggled to fight back against. However, after
having mastered online shopping, Amazon has baffled some by attempting to move into the physical
shopping world to further enlarge their ecosystem. Since 2015, Amazon has been experimenting with
brick and mortar concepts, focused on physical bookstores that double as Amazon gadget showrooms.
However, up until the point Amazon’s footprint was limited to less than a dozen bookstores.41 With this
in mind, it is no surprise that a great deal of the buzz around this deal was related to Amazon’s push to
gain more physical presence.
A. Prime Pantry & Prime Fresh
When looking across Amazon’s vast business, its online grocery platform, Amazon Pantry, and
delivery service, Amazon Fresh are the most in line with the business model of Whole Foods. Sarah
Whitten, an author for CNBC, explained how its purchase would plug into these businesses and help
Amazon develop an area that they see as a key area for growth.
41
24
When examining the existing grocery market, currently around 12% of shoppers bought groceries
online at some point during 2016 according to a report by Cowen and Company.42 The same report found
that millennials were the largest purchasers of groceries online and that population of millennials over 25
were more than 2x more likely to shop online for groceries. This market is particularly attractive in the
grocery space as this population begins to “settle down” and have children.43
In line with this research, Darren Tristano, Chief Insights Officer at research firm Technomic, felt
that "the brand [Whole Foods] is a good compliment to Amazon and [will] allow them to more
aggressively target fresh food delivery to the at-home market.”43
Furthermore, a report issued by RBC Capital Markets indicates that the fresh delivery has a US
addressable market of $800 billion, which expands to $3 trillion globally.43 However, this market is at a
very early stage in its life cycle with online delivery having only a 3.00% penetration rate outside of
Manhattan. It is critical to note that there is not a dominating force in this industry as no delivery
competitor has more than 20% market share in a given location – which offers Amazon the chance to
improve their market presence and gain a more commanding presence of this large addressable market.13
Within its grocery endeavors, Michael Pachter, an analyst at Wedbush Securities said of the deal
that “Amazon clearly wants to be in grocery [and] clearly believes a physical presence gives them an
advantage. I assume the physical presence gives them the ability to distribute other products more locally.
So theoretically you could get 5-minute delivery.”44
42
43
Mahaney, Mark. Whole AMZN... Updating the Long Thesis. RBC Capital Markets, 29 June 2017.
44
25
B. Distribution
However, this new physical presence will not just help in Amazon’s grocery endeavors. In a
report issued on June 28, 2017, Piper Jaffray noted that Whole Foods Market gives Amazon access to
63% of the US population (within a 20 mile radius) which expands its accessibility beyond the previous
46% coverage. Furthermore, the population that exists within 5 miles of an Amazon distribution node is
now 30% vs. the previous 12%. Overall Whole Foods offers 17 new nodes in geographic zones in which
there was not already a fulfilment node. 45
Analysts at Deloitte consulting praised Amazon’s acquisition of a “highly prized urban footprint”
in the form of 11 food storage centers and 450 distribution centers through its store footprint. This
commentary was released in a note advising food retailers how to tackle their response to Amazon’s
entrance into the space.
C. Cross Selling & Technology Development
In addition to building out the Prime Pantry and Amazon Fresh concepts, Amazon has the
opportunity to leverage its new physical retail concept to benefit other elements of Amazon’s business
model. For example, Amazon’s consumer technology offerings such as kindles, echo’s, and other Alexa
based concepts can now be sold in Whole Foods stores.46 Additionally, MorningStar noted that Amazon
can showcase and further develop it’s “Just Walk Out Technology” and experiment with new payment
options and strategies.13
45
Olson, Michael J. Whole Foods Reach Brings Amazon Within 20 Miles of 63% of US Population. Piper
Jaffray, 28 June 2017.
46
Stefurak, Wayne. Amazon.com Inc., Morningstar Corporate Credit Research.
26
D. Supply Chain & Organic Credibility
One element of this deal that has seen definitively less coverage is the supposed benefit of Whole
Foods organic supply chain and brand equity. In a report issued by MorningStar on July 31, 2017, the
rating agency cited that Whole Foods narrow economic moat comes from its organic supply chain and
reputability among organic shoppers.13 The report argues that customers have resisted purchasing natural
or organic products on Amazon and similar online shopping platforms due to the lack of credibility and
ability to prove the organic quality of food. However, Whole Foods is perhaps the most trusted brand in
the space and therefore Amazon can leverage the brand name as well as the Whole Foods private label
product offering through Prime Pantry and Prime Fresh offerings. Similarly, a report issued by Credit
Suisse on June 19, 2017 indicated the firm’s believe that this acquisition was at its core an acquisition of a
national fresh food supply chain that can service its online offerings.47
E. Data
However, not all observers believe that Amazon’s acquisition is strictly about real estate. Among
these observers is Bruno Aziza, a contributor for Forbes Magazine. Aziza sees this move as an extension
of Amazon’s “view of the world of retail.” To dominate the retail world, Amazon has been collecting data
on customers and using this information to optimize the overall business. According to Aziza, Whole
Foods offers Amazon a chance to bring data and technology into the grocery business while working with
a business that has higher margins than its own.48 Greg Petro, another contributor for Forbes Magazine,
elaborates on this idea of this acquisition being a data play. Petro explains that Amazon wants to know the
buying patterns and preferences of customers as well as the correlation between the purchases of different
47
McGuire, Stewart. Global Food Retailing: Online Grocery and the Impact of Amazon. Credit Suisse, 19
June 2017.
48
Aziza, Bruno. “Amazon Buys Whole Foods. Now What? The Story Behind The Story.” Forbes, Forbes
Magazine, 23 June 2017. Accessed 28 Sept. 2017.
27
items. The habitual nature of grocery shopping makes data particularly valuable when aligned with the
right technology. For example, Amazon could push a promotion for a product that a customer regularly
buys every month at around the time you usually reorder in order to incentivize you to buy at Whole
Foods.49
F. Naysayers
However, not every analyst believes that this deal is a slam dunk for all involved. David Trainer,
a contributor for Forbes Magazine, believes that this transaction is rich from the perspective of Amazon
shareholders. Trainer argues that the deal is $6 billion more expensive than listed due to the present value
of operating lease obligations which implies the need to grow NOPAT by 95% to obtain a ROIC of 7%
which would match the weighted average cost of capital of the transaction.50
While Trainer’s issue with the transaction centers around valuation concerns, Sarah Halzack, an
author for Bloomberg.com, takes issue with ability of Amazon to improve the troubled business. Halzack
makes the case that Whole Foods problem is not just based on the expensive nature of products. Upon
announcement, Amazon indicated that it would cut prices to make Whole Foods more competitive from a
price perspective, but according to Halzack – Whole Food’s bigger issue is that it is not a one stop shop as
it lacks the “middle isle items” such as paper towels and packaged goods.51
Furthermore, some analysts are concerned that Amazon will be making changes that impact the
experience of shopping at Whole Foods. In an announcement made in September, Whole Foods stated
that it will push more of the decision making about products to the executives at its headquarters rather
49
Petro, Greg. “Amazon's Acquisition Of Whole Foods Is About Two Things: Data And Product.” Forbes,
Forbes Magazine, 3 Aug. 2017. Accessed 28 Sept. 2017.
50
Trainer, David. “Winner And Losers From Amazon's Proposed Purchase Of Whole Foods.” Forbes,
Forbes Magazine, 20 June 2017, Accessed 3 Sept. 2017.
51
Halzack, Sarah. “Amazon's Price Cuts Won't Solve Whole Foods' Problems.” Bloomberg.com,
Bloomberg, 28 Aug. 2017. Accessed 28 Aug. 2017.
28
than allowing stores to have discretion from a regional level.52 The regional control that managers were
able to exert on their stores allowed for customization for regional tastes and preferences which was a key
element of the store.
In addition to these changes, brand and product representatives will no longer be allowed to
promote their products in store and will not be able to give in store stocking instructions.17 Haddon and
Gasparro further explain in their article for The Wall Street Journal that locally sourced natural and
organic offerings may look to sell their products elsewhere rather than going through the hassle of
pitching to Whole Foods executives in Houston. These brand representatives have historically also
educated employees who disseminate this knowledge among customers which can drive sales. Overall,
Haddon and Gasparro argue that sales of products that require explanation could be diminished.
Amazon.com is looking to standardize operations and prices which takes away some of the charm of
Whole Foods.
Haddon, Heather, and Annie Gasparro. “Amazon Puts Whole Foods on Fast Track to Conventional
52
Supermarket.” The Wall Street Journal, Dow Jones & Company, 21 Sept. 2017.
29
Chapter 7
Review of Amazon’s Initial Strategy Shifts
Since the announcement and subsequent closing of the deal, Amazon has begun making changes
to the business and has offered some details about how they will continue to grow and change the
business of Whole Foods. These announced changes and speculations provide valuable insight that this
paper will use to help create reasonable case scenarios for the accretion model analysis.
A. Pricing
From the first week after the closing of the acquisition, Amazon began slashing prices at Whole
Foods to attempt to eradicate the “Whole Foods, Whole Paycheck” perception. After the closure, Whole
Foods’ website offered this language detailing this first big change.
“The two companies will together pursue the vision of making Whole Foods Market’s high-
quality, natural and organic food affordable for everyone. As a down payment on that vision,
Whole Foods Market is immediately offering lower prices on a selection of best-selling grocery
staples across its stores, with more to come.”53
In fact, on day one Amazon cut prices in Whole Foods as much as 43.00%.54
53
Holden, Ronald. “Baby Amazon's First, Tentative Steps At Whole Foods.” Forbes, Forbes Magazine, 28
Aug. 2017. Accessed 28 Aug. 2017.
54
Kaplan, Jennifer, and Matthew Boyle. “Amazon Cuts Whole Foods Prices as Much as 43% on First
Day.” Bloomberg.com, Bloomberg, 28 Aug. 2017. Accessed 28 Aug. 2017.
30
Change in Prices at Mid-Town Manhattan
Whole Foods between Aug. 24 - Aug. 28
Product % Change
Whole Trade Organic Bananas (30%)
Whole Trade Bananas (38)
Responsibly-Farmed Atlantic Salmon Filet (33)
Responsibly-Farmed Tilapia (33)
Organic Large Brown Eggs (7)
Animal-Welfare-Rated 85% Lean Ground Beef (29)
Organic Avocados (29)
Organic Baby Kale (13)
Organic Baby Lettuce (13)
Creamy Almond Butter (13)
Crunchy Almond Butter (13)
Organic Gala Apples (33)
Organic Fugi Apples (43)
Organic Rotisserie Chicken (29)
365 Organic Butter (15)
Source: Bloomberg, Kaplan
Figure 6. Change in Price at Whole Foods Location

While these price cuts are significant – competitors immediately began lowering prices to remain
competitive.
In a separate study, JP Morgan research analysts – Ken Goldman and Thomas Palmer recently
performed channel checks at Ralphs, Sprouts, and Whole Foods in the Los Angeles market, which is the
largest market for each of the respective grocers. The JP Morgan analysts attempted assess the price
landscape after the acquisition.55
Goldman and Palmer compared prices on their natural and organic price list in addition to
products that were advertised by Amazon as discounted. For products on the natural and organic shopping
list for JP Morgan research, Ralphs and Sprouts are now 4% and 5% less expensive respectively where
they were both around 11% less expensive before the cuts. For products that were advertised as
discounted, Ralphs is now 4% more expensive than Whole Foods where WFM used to be 20% more
expensive. Similarly, WFM is now 1.3% less expensive than Sprouts where it used to be 24% more
expensive than Sprouts.56
55
Goldman, Ken, and Thomas Palmer. Whole Foods Market Inc. J.P. Morgan, 11 May 2017.
56
LaVito, Angelica, and Lauren Thomas. “Amazon makes Whole Foods' prices more competitive with
rivals in LA: JPMorgan.” CNBC, CNBC, 18 Sept. 2017. Accessed 21 Sept. 2017.
31
Price Landscape Before and After Price Cuts
In the Greater Los Angeles Area
When Compared to Whole Foods
Grocer Before After
Items on the Natural and Organic List
Ralphs (11%) (4%)
Sprouts (11) (5)
Products Advertised as Discounted

Ralphs (20%) 4%
Sprouts (24) 1
Source: LaVito, JP Morgan
Figure 7. Competitive Price Landscape

The research team also noted that price cuts largely focused on Whole Foods 365 products and
produce which will likely result in competitors following suit due to increased traffic at Whole Foods
locations.57
The marriage between Whole Foods and Amazon has allowed the joint company to attack the
price perception problem head on. As a standalone company, Whole Foods would have to sacrifice
quality of goods to lower price, Amazon’s war chest allows them to make investments into prices. Now
Amazon can use its considerable size and position to strong arm suppliers of high quality products into
offering better prices. This is very important factor when considering Amazon – Whole Food’s ability to
capture market share moving forward. Analysts at Deloitte consulting pointed out that Amazon can use its
size and scale to force competitors out of the market by causing a deflationary race to the bottom. As a
joint unit, Amazon can use its newly found grocery influence to push down prices in vendor negotiations
to offer lower prices in stores. This will lead to a renewed deflationary cycle in the grocery space which
will pressure the margins of other retailers while lower prices at Whole Foods will increase customer
loyalty.58
57
LaVito, Angelica, and Lauren Thomas. “Amazon makes Whole Foods' prices more competitive with
rivals in LA: JPMorgan.” CNBC, CNBC, 18 Sept. 2017. Accessed 21 Sept. 2017.
58
Sides, Rodney. The Amazon-Whole Foods acquisition is a wake-up call for retailers. Deloitte Consulting,
23 Aug. 2017.
32
However, the validity of that argument is called into question, at least in the short term, when
observing the average price index for conventional and organic goods. David Yanofsky, an author for
Quartz, wrote a piece proving this statement based on USDA Market Data. Yanofsky points out that after
a brief seasonal drop in prices through September, the prices for both organic and conventional goods are
back to their average.59
Figure 8. Changes in the Food Prices Industry Wide

While it remains to be seen if prices will begin to lower across the board, there is an argument to
be made that prices will not be broadly altered considering the fact that Whole Foods are only present in
certain markets.26 Furthermore, Yanofsky points out that in some Whole Foods the net change in prices is
not actually that notable, citing that a Whole Foods in Princeton, New Jersey are only down 1.2% since
the Amazon take-over. When looking at this and the fact that Whole Foods traffic improved 25% in the
days after the takeover finalized, Yanofsky points out that Amazon and Whole Foods are effectively using
marketing to make Whole Foods look more affordable than it was before. Essentially, Amazon is tricking
the uninformed consumers and increasing the company’s margins through improved traffic.26
59
Yanofsky, David. “Amazons Whole Foods deal isnt disrupting grocery prices.” Quartz, Quartz, 21 Oct.
2017.
33
B. Traffic
One of the ways that made Amazon uniquely qualified to solve Whole Food’s problem is its
ability to drive Amazon customers into Whole Foods stores. These same Whole Foods stores have
suffered from falling same store sales before the acquisition. To this point, Amazon has stated that they
will drive traffic through taking returns for Amazon in store and through the installation of Amazon
lockers in store.60
By allowing Amazon shoppers to return items in store, they have developed a creative way to use
real estate and encourage more shoppers to buy things online since there will be an easier way to return
them.27 This provides synergies to both businesses as Whole Foods will see a traffic benefit from this
feature and Amazon will be able to drive more traffic online with free, in-store, returns.
C. Prime Integration
Amazon Prime has been seen as the secret sauce of the very successful retail arm of Amazon.
Amazon Prime is a subscription based service that began with a core benefit of receiving free two-day
shipping after paying a once a year member ship fee of $99.00 at the basic level. Since the program’s
inception in 2005, Amazon has continued to add services and offerings to the program in order to make
the subscription service more and more attractive. The program initially offered just free two day shiping
but have expanded to include offerings such as Amazon Prime Music and Video (which are large
streaming services that are offered for no additional cost), access to the Amazon Kindle Lending Library,
free one day shipping in some areas, access to the Amazon Restaurant delivery service among other
60
Rella, Emily. “You can now return your Amazon purchases in these two major retail stores for free --
Yes, really!” AOL.com, Patrick Kulp, 20 Sept. 2017. Accessed 21 Sept. 2017.
34
benefits. Amazon continues to pour benefits into the service as Prime customers spend 2x more than non-
Prime customers.61
In line with this, it is interesting to consider how Prime will integrate into the Whole Foods
systems. In a research report issued by MorningStar on July 31, 2017, the rating agency noted that they
believed there to be a high degree of overlap between Prime members and Whole Foods customers, up to
66% overlap. With this in mind there is an easy path from integrating Whole Foods into the Prime Fresh
platform and a clear path to convert Prime Customers to Whole Foods customers.62 However, on
opposing side Brian Nowak, an analyst at Morgan Stanley, believes that 80% of the US Amazon Prime
customers (38 million customers), are not current shoppers of Whole Foods. However, Nowak believes
that Amazon can improve this by improving the Prime Now offering which will be aided by adding
Whole Foods into the supply chain network of Prime Now.63
D. Other Changes
Additionally, Amazon has begun selling Amazon technology in the Whole Foods store concept.
This is a small change that will allow Amazon to push more of their technology to new customers and
continue to collect data on Amazon customers.64
61
Reisinger, Don. “Here's How Much Amazon Prime Customers Spend Per Year.” Fortune, 18 Oct. 2017.
62
Hottovoy, RJ. Amazon.com Inc. . Morningstar Equity Research, 31 July 2017.
63
Archer, Seth. “Amazon is Bringing its Biggest Weapon to Whole Foods to Make Sure it Succeeds.”
Business Insider, Business Insider, 14 Sept. 2017. Accessed 16 Sept. 2017.
64
Kaplan, Jennifer, and Matthew Boyle. “Amazon Cuts Whole Foods Prices as Much as 43% on First
Day.” Bloomberg.com, Bloomberg, 28 Aug. 2017. Accessed 28 Aug. 2017.
35
Chapter 8
Methodology
A. Experience and Methodology Preface
The goal of this model and methodology is to determine the operating cases that will result in
accretion to Amazon’s earnings. A Chapter 9 will discuss the cases and the rationale that created them.
This methodology will focus on the assumptions and inputs that are made outside of the case assumptions
which include revenue, gross margin, and operating expense assumptions.
The methodology chapter will also discuss the functionality of the accretion dilution analysis and
the respective operating models.
B. Overarching Model Assumptions
The goal of this model is to determine under what financial assumptions will Amazon’s
acquisition of Whole Foods will be accretive to the bottom line. To meet this end, this paper will make a
few overarching assumptions.
1. This paper will assume no major economic shocks to United States to the upside or
downside.
2. This paper will not attempt to assume changes in market share based on competitor
changes. Due to the commoditized nature of the grocery industry, when prices are
lowered by one peer, competitors in a given region may be inclined to follow. Due to the
inherent difficulty in forecasting the decisions made by competitors, this paper will not
attempt to do so.
36
3. This paper will assume that Amazon does not enact any earthshattering change to the
Whole Foods platform and business (i.e. closing stores, ending the Whole Foods 365
concept, moving to a lower end market strategy etc.)
4. This paper will assume that Amazon and Whole Foods does not “grow the pie” in terms
of total grocery market consumption.
5. This paper takes market data based on June 15th, the day before the acquisition and only
looks at the first and second quarter historical data considering that this is the last quarter
that Whole Foods reported as a standalone company.
C. Amazon.com Operating Model Assumptions
This paper uses Wall Street Sell Side research cross referenced with Factset estimate averages to
select a research report to base estimates on. Considering that the goal of this paper is to determine the
scenarios from an operational synergies perspective that result in an accretive deal while not making
strong assumptions about the two underlying businesses. To this end, for the operating model for
Amazon, this paper examines sales, cost of sales, EBIT, Interest Expense, Net Income, and Capital
Expenditures to decide what Wall Street Sell Side research firm to reference in the model. These metrics
were selected as they are critical line items that drive the financial statements and need to be projected
through the model. The Factset average is then compared against 5 different sell side research reports that
all have fairly in line estimates (without a strong negative or positive outlook on Amazon). The Factset
average is then compared to these reports to find one that is most in-line. The relative in-line nature is
weighed against several other factors such as length of projection window and detailed nature of line
items to select a report.

37
Connecting to a single research report is important as it creates a consistent operating model with
one external source driving estimates. This is helpful when projecting weighted average shares
outstanding and EPS.
In line with this methodology, this paper examines from five different scenarios from reputable
firms: Maxim Group, RBC Capital Markets, Piper Jaffray, UBS, and Cowen and Company. All of the
research reports considered were reported after the acquisition was announced and after Amazon.com’s
second quarter was released. The assumptions are not pro-forma for the acquisition.
After reviewing these metrics, Cowen and Company was selected to serve as the projection
estimates tie well to the Factset average in the sales and cost of sales. The Cowen and Company estimates
for interest expense and net income tie well to the average of the selected research set. Additionally,
Cowen’s report forecasts the entire time horizon, which removes inconsistency of projecting the end of
the window based on historical averages.
After selecting a research report, not many other assumptions are made about this operating
model with the exception of the debt pay-down schedule. Within that pay down schedule, the model
assumes no discretionary pay-downs of debt and assumes an interest rate on cash of 0.10% based on
conversations with industry professionals. Additionally, this model assumes that Amazon does not issue
additional debt. This assumption is based on the historically low debt balance of Amazon.
38
Figure 9. Amazon.com Wall Street Research Estimates65 66 67 68 69
Q3 - Q4 2017E 2018E 2019E 2020E

Sales $85,351 $165,676 $200,866 $292,427 $280,494
Maxim Group (7.20.2017) 94,740 167,430 205,269 241,386 271,675
RBC Capital Markets (6.29.2017) 91,676 164,000 194,963 227,674 NMF
Piper Jaffray (6.28.2017) 92,421 165,194 201,877 240,735 280,410
UBS (6.19.2017) 54,137 164,520 194,665 227,501 261,208
Cowen & Company (6.19.2017) 93,781 167,238 207,556 524,839 308,683
Factset Average 95,385 168,828 207,492 251,202 299,750
Cost of Sales ($59,813) ($104,885) ($124,587) ($145,565) ($169,298)

Maxim Group (7.20.2017) (60,318) (105,336) (127,087) (147,033) (162,763)
RBC Capital Markets (6.29.2017) (59,282) (104,444) (121,238) (138,164) NMF
Piper Jaffray (6.28.2017) (59,208) (104,645) (124,804) (147,226) (169,850)
UBS (6.19.2017) NMF (103,921) (120,980) (139,807) (159,231)
Cowen & Company (6.19.2017) (60,443) (106,079) (128,827) (155,596) (185,349)
Factset Average (62,300) (108,080) (131,570) (153,574) (179,914)
EBIT $3,696 $7,014 $11,375 $16,135 $21,878

Maxim Group (7.20.2017) 5,717 10,271 14,775 19,818 26,267
Piper Jaffray (6.28.2017) 3,335 5,375 10,768 16,043 22,481
UBS (6.19.2017) NMF 9,369 13,262 17,489 21,810
Cowen & Company (6.19.2017) 2,893 5,125 8,859 12,441 16,955
Factset Average 1,638 3,269 6,533 11,863 19,418
Interest Expense ($251) ($484) ($470) ($451) ($377)

Maxim Group (7.20.2017) (251) (506) (506) (506) (506)
RBC Capital Markets (6.29.2017) (278) (556) (556) (556) NMF
Piper Jaffray (6.28.2017) NMF NMF NMF NMF NMF
UBS (6.19.2017) NMF (427) (371) (288) (181)
Cowen & Company (6.19.2017) (224) (448) (446) (456) (445)
Factset Average (312) (589) (679) (701) (746)
Net Income $2,032 $3,541 $6,326 $9,495 $13,044

Maxim Group (7.20.2017) 2,472 4,385 7,143 10,354 14,478
Piper Jaffray (6.28.2017) 2,015 3,336 6,695 10,124 14,309
UBS (6.19.2017) NMF 3,447 5,941 8,792 11,725
Cowen & Company (6.19.2017) 1,868 3,381 5,932 8,471 11,665
Factset Average 933 1,865 4,056 7,422 11,542
Capital Expenditures ($4,075) ($7,779) ($8,957) ($10,159) ($11,376)

Maxim Group (7.20.2017) (3,962) (7,586) (7,813) (8,048) (8,289)
RBC Capital Markets (6.29.2017) NMF NMF NMF NMF NMF
Piper Jaffray (6.28.2017) (4,188) (7,949) (9,720) (11,598) (13,514)
UBS (6.19.2017) NMF (7,713) (8,738) (9,641) (10,414)
Cowen & Company (6.19.2017) NMF (7,867) (9,556) (11,351) (13,286)
Factset Average (4,481) (8,983) (10,105) (11,343) (12,435)
65
Forte, Tom. Expect Solid Sales and Profitability; Looking for Details on Whole Foods Acquisition -
Reiterate Buy. Maxim Group, 20 July 2017.
66
67
Olson, Michael J. Whole Foods Reach Brings Amazon Within 20 Miles of 63% of US Population. Piper
Jaffray, 28 June 2017.
68
Sheridan, Eric J. Acquiring The Whole (Prime) Foods Opportunity. UBS Equity Research, 19 June 2017.
69
Blackledge, John. PRIMEd for Higher Adoption - Ahead of the Curve Series Video. Cowen and
Company, 19 June 2017.
39
Figure 10. Amazon Operating Model Summary70
Income Statement
For the Period Ending December 31st,
2016A Q1 - Q2 2017A Q3 - Q4 2017E 2018E 2019E 2020E
Net Sales $135,987 $73,669 $93,781 $207,556 $254,839 $308,683
Cost of Sales (88,265) (45,891) (60,443) (128,827) (155,596) (185,349)
Gross Margin 47,722 27,778 33,338 78,730 99,243 123,333
Opearting Expense (43,536) (26,146) (30,445) (69,871) (86,802) (106,378)
Operating Income 4,186 1,632 2,893 8,859 12,441 16,955
Net Interest Income (Expense) (384) (199) (182) (313) (262) (206)
Other Income (Expense) 90 185 -- -- -- --
Profit Before Taxes 3,892 1,618 2,711 8,545 12,180 16,749
Income Taxes (1,425) (695) (813) (2,564) (3,654) (5,025)
Equity-Method Investment (96) (2) -- -- -- --
Net Inome 2,371 921 1,898 5,982 8,526 11,724
Diluted Earnings Per Share $4.90 $1.86 $3.80 $11.62 $16.09 $21.52
Memo: All figures in millions except per share figures
Balance Sheet
As of the Period Ending December 31st,
2016A Q1 - Q2 2017A Q3 - Q4 2017E 2018E 2019E 2020E
Assets
Cash & Cash Equiv. $19,334 $13,203 $6,333 $32,123 $55,743 $87,044
Net Working Capital (24,016) (20,964) (9,378) (20,756) (25,484) (30,868)
Other Current Assets 6,647 8,248 8,248 8,248 8,248 8,248
PP&E 29,114 37,083 35,430 32,325 27,876 22,024
Goodwill 3,784 4,254 4,254 4,254 4,254 4,254
Other Assets 4,723 5,437 5,437 5,437 5,437 5,437
Total Assets $39,586 $47,261 $50,323 $61,631 $76,073 $96,139
Liabilities
Long term Debt 7,694 7,683 7,832 7,832 6,832 6,332
Other Long Term Liab. 12,607 16,364 16,364 16,364 16,364 16,364
Total Liabilities $20,301 $24,047 $24,196 $24,196 $23,196 $22,696
Shareholder's Equity
Total Shareholder's Equity $19,285 $23,214 $26,127 $37,435 $52,877 $73,443
70
Amazon.com Inc. Form 10-K 2016. Securities and Exchange Commission.
40
Statement of Cash Flows
2016A Q1 - Q2 2017A Q3 - Q4 2017E 2018E 2019E 2020E
Beginning Cash Balance $13,203 $6,333 $32,123 $55,743

Net Income 1,898 5,982 8,526 11,724
D&A 5,159 12,661 15,800 19,138
SBC 2,165 5,326 6,917 8,841
Change in NWC (11,586) 11,378 4,728 5,384
Other Operating Cash Flows -- -- -- --
CAPEX (3,505) (9,556) (11,351) (13,286)
Net Cash Flow ($5,870) $25,790 $24,619 $31,802
Mandatory Debt Paydowns (1,000) -- (1,000) (500)
Discretionary Debt Paydowns -- -- -- --
Ending Cash Balance $6,333 $32,123 $55,743 $87,044
Memo: All figures in millions
D. Whole Foods Market Operating Model Assumptions
Using the same methodology to select average research estimates for Whole Foods Markets’
stand-alone model, this paper examines reports from major financial institutions including UBS, Barclays,
JP Morgan, and Morgan Stanley. The JP Morgan and Barclays reports were eliminated from the
consideration as the base case research report due to the limited time frame and line items that both firms
offered. Between UBS and Morgan Stanley, this paper refers to UBS as it was a more recent report that
included the most recent earnings and because the report was frequently in line with the Factset consensus
estimates.
41
Figure 11. Whole Foods Market Wall Street Research Estimates71 72 73 74
2017E 2018E 2019E 2020E
Sales $15,926 $16,423 $16,874 $17,599
UBS (7.10.2017) 15,907 16,329 17,017 17,862
Barclays (6.19.2017) 15,881 16,510 16,683 NMF
JP Morgan (5.11.2017) 15,993 16,634 17,035 NMF
Morgan Stanley (5.11.2017) 15,924 16,220 16,761 17,336
Factset Average 15,925 16,561 17,037 17,777
Cost of Sales ($10,564) ($10,940) ($11,339) ($11,760)

UBS (7.10.2017) (10,540) (10,893) (11,352) (11,916)
Barclays (6.19.2017) NMF NMF NMF NMF
JP Morgan (5.11.2017) (10,589) (11,112) (11,463) NMF
Morgan Stanley (5.11.2017) (10,564) (10,816) (11,202) (11,605)
Factset Average (10,512) (11,005) (11,377) (11,955)
EBIT $721 $729 $738 $743

UBS (7.10.2017) 706 706 690 724
Barclays (6.19.2017) 720 745 751 NMF
JP Morgan (5.11.2017) 735 758 781 NMF
Morgan Stanley (5.11.2017) 725 706 729 763
Factset Average 722 753 797 959
Interest Expense ($48) ($60) ($72) ($78)

UBS (7.10.2017) (45) (45) (45) (45)
Barclays (6.19.2017) NMF NMF NMF NMF
JP Morgan (5.11.2017) (52) (72) (82) NMF
Morgan Stanley (5.11.2017) (47) (63) (88) (110)
Factset Average (50) (52) (51) (51)
Net Income $402 $415 $418 $411

UBS (7.10.2017) 403 403 400 421
Barclays (6.19.2017) 414 436 443 NMF
JP Morgan (5.11.2017) 421 426 434 NMF
Morgan Stanley (5.11.2017) 371 395 395 401
Factset Average 416 438 450 548
Capital Expenditure ($626) ($627) ($625) ($528)

UBS (7.10.2017) (630) (534) (511) (536)
Barclays (6.19.2017) (632) (707) (745) NMF
JP Morgan (5.11.2017) (604) (700) (700) NMF
Morgan Stanley (5.11.2017) (637) (568) (545) (520)
Factset Average (627) (691) (689) NMF
71
Goldsmith, Michael. Whole Foods Market: A Whole Valuation. UBS Equity Research, 10 July 2017.
72
Short, Karen . Whole Foods Market Inc: Darwinism at Its Best. Barclays Equity Research, 16 June 2017.
73
Goldman, Ken, and Thomas Palmer. Whole Foods Market Inc. J.P. Morgan, 11 May 2017.
74
Sinisi, Vincent J , and Andrew R Ruben. 2Q Review: 'Show Me Story' Continues with Addition of 2020
Financial Targets. Morgan Stanley Research, 11 May 2017.
42
After selecting a research report, this model calenderizes the historical and projected financials to
align with Amazon.com’s company year to allow for an apples to apples addition when completing the
merger model. Whole Foods’ year end is at the end of September whereas Amazon’s year ends in
December. The below figure demonstrates the alignment needed to align the company years.
Figure 12. Calenderization
2016 2017
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Amazon.com Mar Jun Sep Dec Mar Jun Sep Dec
Whole Foods Dec Mar Jun Sep Dec Mar Jun Sep
43
Figure 13. Whole Foods Market Operating Model75
Income Statement
2016A Q1 - Q2 2017A Q3 - Q4 2017E 2018E 2019E 2020E
Sales $24,174 $7,463 $8,550 $16,501 $17,228 $18,077
Cost of Goods Sold (15,924) (4,921) (5,707) (11,008) (11,493) (12,060)
Gross Margin 8,250 2,542 2,842 5,493 5,735 6,018
Operating Expense (7,085) (2,190) (1,933) (4,791) (5,037) (5,285)
Operating Income 1,166 352 910 702 699 733
Net Interest Income (Expense) (68) (22) (23) (45) (45) (45)
Other Income (Expense) 14 6 (6) -- -- --
Profit Before Taxes 1,112 336 881 657 654 688
Income Taxes (432) (131) (343) (255) (248) (261)
Net Income 680 205 537 402 405 426
OCI, net of tax (1) 3 (3) -- -- --
Comprehensive Income 471 208 534 402 405 426
Diluted Earnings Per Share $0.60 $1.70 $1.33 $1.39 $1.51
Memo: All figures in millions except per share figures
Balance Sheet
As of the Period Ending December 31st,
2016A Q1 - Q2 2017A Q3 - Q4 2017E 2018E 2019E 2020E
Assets
Cash and Cash Equiv. $279 $677 $1,213 $1,098 $976
Net Working Capital 92 85 165 172 181
Other Current Assets 844 844 844 844 844
Deferred Income Taxes 222 222 222 222 222
PP&E 3,482 3,498 3,454 3,374 3,290
Goodwill and Other Intangibles 780 780 780 780 780
Deferred Income Taxes 87 87 87 87 87
Other Long Term Assets 70 70 70 70 70
Total Assets $5,856 $6,263 $6,835 $6,647 $6,450
Liabilities
Other Liabilities 1,350 1,350 1,350 1,350 1,350
Long Term Debt and Capital Lease 1,048 1,054 1,051 1,048 1,046
Total Liabilities $2,398 $2,404 $2,401 $2,398 $2,396
Shareholder's Equity
Total Shareholder's Equity $3,458 $3,859 $4,434 $4,249 $4,054
75
Whole Foods Market Inc. Form 10-K 2016. Securities and Exchange Commission.
44
Statement of Cash Flows
2016A Q1 - Q2 2017A Q3 - Q4 2017E 2018E 2019E 2020E
Beginning Cash Balance $279 $677 $1,213 $1,098

Net Income 534 402 405 426
D&A 328 572 597 627
SBC 10 61 61 61
Change in NWC 7 (80) (7) (8)
Share Repurchases (243) (400) (400) (400)
Dividends Paid (74) (223) (225) (222)
Other Operating Cash Flows (92) (15) (25) (61)
Other Investing Cash Flows 20 -- -- --
Other Financing Cash Flows 253 750 -- --
CAPEX (343) (528) (517) (543)
Net Cash Flow $399 $539 ($112) ($120)
Mandatory Debt Paydowns (1) (3) (3) (2)
Discretionary Debt Paydowns -- -- -- --
Ending Cash Balance $677 $1,213 $1,098 $976
E. Transaction Assumptions
Having fleshed out the operating models of both Amazon and Whole Foods Market, it is
important to layout the assumptions surrounding the transaction. Most transaction inputs are based on
actual transaction facts as the acquisition has already closed.
Firstly, this transaction was an all-cash transaction financed completely by debt. This paper
assumes that financing and transaction expenses are also funded by debt as Amazon issued $16 billion in
debt upon the closing of the acquisitions.

45
Figure 14. Debt Issuance and Sources and Uses
Transaction Sources Transaction Uses
$ % $ %
New Debt Issued $13,883 100.0% Purchase of Equity $13,700 98.7%
Excess Cash -- -- Financing Fees 80 0.6%
New Equity Issuance -- -- Transaction Expenses 103 0.7%
Total Sources $13,883 100% Total Uses $13,883 100%
Financing Assumptions
Years to Interest Financing
Trache Principal Maturity Maturity Rate Fixed? Cost Total
Amazon 4.250% 22-AUG-2057 $2,250 08/2057 40 4.25% YES 0.50% 11
Amazon 4.050% 22-AUG-2047 3,500 08/2047 30 4.05% YES 0.50% 18
Amazon 3.875% 22-AUG-2037 2,750 08/2037 20 3.88% YES 0.50% 14
Amazon 3.150% 22-AUG-2027 3,500 08/2027 10 3.15% YES 0.50% 18
Amazon 2.800% 22-AUG-2024 2,000 08/2024 7 2.80% YES 0.50% 10
Amazon 2.400% 22-FEB-2023 1,000 02/2023 6 2.40% YES 0.50% 5
Amazon 1.900% 21-AUG-2020 1,000 08/2020 3 1.90% YES 0.50% 5
Total New Debt $16,000 $80
Figure 11 depicts the transaction sources which is made up of debt as well as the uses of funds
which include the purchase of equity, transaction costs (ie. banker fees), and transaction expenses. The
cost of obtaining financing, or the financing fees) is determined by assuming a 0.50% cost from the banks
issuing debt. The same can be said of a 0.75% fee assumption around the equity value of the deal, which
makes up the transaction expense cost. Additionally, as of 9.14.2017, Amazon had not refinanced any
debt, Whole Foods or otherwise, so it is assumed that the debt was rolled. Finally, it assumed that the
financing fees are amortized across their respective years to maturity which factors into the new goodwill
calculation seen in figure 15.

46
Figure 15. New Goodwill Calculation
New Goodwill Creation

Offer Value $13,700
Book Value of Whole Foods Equity (3,458)
Existing Goodwill & Other Ing. 780
Excess Purchase Price $11,022
Incrememntal Write-Up of Intangibles (2,204)
Incrememntal Write-Up of PPE --
New Deferred Tax Liabilities Created 661
New Goodwill $9,479
Memo: All Figures in millions
When allocating new goodwill, 20% is allocated to the write-up of existing intangibles – this 20%
assumption is based upon the value of Whole Food’s brand equity which it can be argued is the reason
that Amazon is purchasing Whole Foods. 0% is allocated to writing up existing property, plant, and
equipment because the acquisition adds no value to the physical assets of the company. These two values
are added together and multiplied by the Amazon tax rate to determine the creation of a new deferred tax
liability. This summed value is subtracted from the Excess Purchase Price to determine the creation of
new goodwill.
F. Case Methodology
After building out the operating models of Amazon and Whole Foods Market based on estimates
close to consensus and after inputing assumptions surrounding the transaction, the paper now sets up the
actual analysis of the transaction which involves analyzing the operational cases that lead to synergies.
The three line items that this paper examines are potential synergies in revenue, gross margin, and
operating expenses. Each line item is run through the model with four cases the standalone scenario,
along with conservative, moderate, and aggressive estimate cases. Then the paper looks at 40 cases
47
examining different combinations of the cases. These cases are then run through the joined financial
statements to determine accretion and dilution. For reference, the case running in Figure 16 is based on
the status quo for Whole Foods.
Figure 16. Combined Income Statement
Combined Income Statement

For the Year Ending December 31st,
Q3 - Q4 2017E 2018E 2019E 2020E
Amazon Net Sales $93,781 $207,556 $254,839 $308,683
Whole Foods Net Sales 8,550 16,501 17,228 18,077
Synergies -- -- -- --
Pro Forma Net Sales 102,330 224,057 272,067 326,760
Amazon EBITDA 8,051 21,520 28,241 36,093

Whole Foods EBITDA 1,237 1,274 1,296 1,359
Synergies -- -- -- --
Pro Forma EBITDA 9,288 22,794 29,537 37,453
Amazon D&A 5,159 12,661 15,800 19,138

Whole Foods D&A 328 572 597 627
Purchase Accounting 147 147 147 147
Pro-Forma D&A 5,633 13,380 16,544 19,912
Pro Forma EBIT 3,655 9,414 12,993 17,541
Interest Expense, Net (379) (744) (597) (439)

Deferred Financing Fees (7) (7) (7) (7)
Pro Forma Pretax Income 3,269 8,662 12,388 17,095
Income Tax Expense (1,051) (2,655) (3,769) (5,185)

Blended Tax Rate (32%) (31%) (30%) (30%)
Pro Forma Net Income $2,218 $6,007 $8,619 $11,910
Pro Forma EPS $4.44 $11.67 $16.27 $21.86

Memo: Status Quo Acq. EPS $3.80 $11.62 $16.09 $21.52
EPS Accretion / (Dilution) - $ $0.64 $0.05 $0.18 $0.34

EPS Accretion / (Dilution) - % 17% 0% 1% 2%
48
Chapter 9
Case Analysis and Accretion Output
Revenue synergies are often considered to be the most difficult to predict; however, when
considering the retail nature of this transaction and the ability to cross sell products, revenue synergies are
highly likely. In fact, Amazon is already selling Amazon technology in Whole Foods stores and selling
Whole Foods 365 private label products on Amazon.com. Additionally, through traffic based initiatives
such as the implementation of Amazon lockers, allowing for returns at Whole Foods locations, and more
aggressive marketing and pricing, it is reasonable to expect that Amazon will be able to drive more traffic
into Whole Foods locations. As a matter of fact, directly after the acquisition closed, traffic at Amazon
stores increased by 25% as price cuts were announced.76 While it is hard to say how traffic has fared since
then, it is undeniable that there will be sales synergies. However, these synergies will be somewhat offset
by lower prices on products so it is important to remain conservative regarding sales estimates when
casing the model.
In line with Amazon’s initial strategy of lowering prices, it is important to case gross margins as
lowering prices and attempting to remove the “Whole Wallet” stigma will result in a lower margin for
Whole Foods. When building out potential cases it is important to note that there is still ambiguity about
how significant and lasting these price cuts will be. As discussed above, in some stores on the first day
prices fell as much as 43% on some items; however, since the takeover some have found that prices have
reverted close to their original values. For example, at a Whole Foods in Princeton, New Jersey - prices
are only down 1.2% since the Amazon take over.76 Regardless, these price declines will be offset by
Amazon’s ability to command better prices throughout its supply chain due to its improved ordering
scale.
76
Yanofsky, David. “Amazons Whole Foods deal isnt disrupting grocery prices.” Quartz, Quartz, 21 Oct.
2017.
49
Finally, operating expense synergies must be considered as Amazon is able to bring its
considerable back office into improving systems at Whole Foods including payroll, HR, transit costs, and
inventory management systems.
Figure 17. Case Outline
Whole Foods Cases

Case Name Q3 - Q4 2017E 2018E 2019E 2020E
Revenue Growth
1 Standalone (33.76%) 3.05% 4.41% 4.93%
2 Scenario 1 (33.43%) 3.71% 5.41% 5.93%
3 Scenario 2 (33.09%) 4.37% 6.41% 6.93%
4 Scenario 3 (32.76%) 5.03% 7.41% 7.93%
Gross Margin
1 Standalone 33.24% 33.29% 33.29% 33.29%
2 Scenario 1 32.15% 31.12% 30.00% 30.00%
3 Scenario 2 31.48% 29.80% 28.00% 28.00%
4 Scenario 3 30.91% 28.67% 26.29% 26.29%
Operating Expense as % of Sales excl. D&A
1 Standalone 18.78% 25.57% 25.77% 25.77%
2 Scenario 1 18.56% 24.91% 24.77% 24.77%
3 Scenario 2 18.34% 24.25% 23.77% 23.77%
4 Scenario 3 18.12% 23.59% 22.77% 22.77%
This model assumes that full synergies are reached in 2019 and that partial synergies are achieved
in 2017 and 2018, equating to a 33% and 67% synergy work-in each respective year. This method is used
as Whole Foods had one quarter of contribution to Amazon’s third quarter and then the second month
which represents four months or one third. Assumptions are held constant between 2019 and 2020. A
depiction of the case inputs can be found in Appendix A.

50
A. Accretion Output
Taking each scenario case and running it through the combined income statement results in the
EPS accretion for each combination of revenue, gross margin, and operating expense case. A year by year
accretion analysis can be found in Appendix B but figure 15 examines the total accretion that occurs
between the second half of 2017 and the end of 2020. All case combinations can be found in Appendix A.
Figure 18. Total Accretion for Each Case

Total Accretion Earnings Accretion (
Case $ %
1 $1.21 2%
2 1.97 4%
3 2.75 5%
4 3.57 7%
5 (0.92) (2%)
6 (0.20) (0%)
7 0.54 1%
8 1.31 2%
9 (2.21) (4%)
10 (1.52) (3%)
11 (0.80) (2%)
12 (0.06) (0%)
13 (3.31) (6%)
14 (2.65) (5%)
15 (1.95) (4%)
16 (1.23) (2%)
17 (0.29) (1%)
18 0.44 1%
19 1.20 2%
20 (0.03) (0%)
21 (0.94) (2%)
22 (0.23) (0%)
23 (1.46) (3%)
24 (0.73) (1%)
25 (1.42) (3%)
26 (2.65) (5%)
27 (1.95) (4%)
28 (1.23) (2%)
29 (0.94) (2%)
30 (0.23) (0%)
31 (0.80) (2%)
32 (0.06) (0%)
33 (2.05) (4%)
34 (1.36) (3%)
35 (1.95) (4%)
36 (1.23) (2%)
37 (1.42) (3%)
38 (1.36) (3%)
39 (1.29) (2%)
40 (1.23) (2%)
51
Of these forty examined cases, only eight cases are accretive to the three-and-a-half year period.
Case 1 – The first case is the status quo case. Assuming that the Whole Foods business does not
deteriorate further, Whole Foods will be an accretive acquisition if they make no substantial changes to
the business. However, that is a large assumption considering the heat of competition in the natural and
organic grocery space. Separately, Amazon has already begun to make changes to the concept as outlined
previously. Therefore, the paper assumes that case one is an unlikely scenario.
Figure 19. Case 1

Revenue Assumptions Gross Margin Assumptions Opex as % of Sales Assumptions
Case Q3 - Q4 2017E 2018E 2019E 2020E Q3 - Q4 2017E 2018E 2019E 2020E Q3 - Q4 2017E 2018E 2019E 2020E
1 (34%) 3% 4% 5% 33% 33% 33% 33% 19% 26% 26% 26%
Case 2 – This case assumes marginally inclining revenue, consistent gross margins, and marginal
operating expense improvements. Thinking about this from a conceptual perspective, Whole Foods would
be able to increase sales through cross product sales, traffic improvements, and additional marketing but
cut margins to a limited extent. This is in-line with the expectation that cost cuts were superficial and
temporary.
Figure 20. Case 2

2 (33.43%) 3.71% 5.41% 5.93% 33.24% 33.29% 33.29% 33.29% 18.56% 24.91% 24.77% 24.77%
Difference from SA 0.33% 0.66% 1.00% 1.00% -- -- -- -- (0.22%) (0.66%) (1.00%) (1.00%)
Case 3 – Case three assumes no gross margin adjustment but sees greater revenue growth and
more significant operational expense improvement.
Figure 21. Case 3

3 (33.09%) 4.37% 6.41% 6.93% 33.24% 33.29% 33.29% 33.29% 18.34% 24.25% 23.77% 23.77%
52
Case 4 – This case sees the most bullish revenue growth assumptions in line with the most bullish
operating expense improvements.
Figure 22. Case 4

4 (32.76%) 5.03% 7.41% 7.93% 33.24% 33.29% 33.29% 33.29% 18.12% 23.59% 22.77% 22.77%
Case 7 – This case sees moderate sales growth, a small decline in gross margin (assume some
sticky price cuts), and moderate operating expense improvement.
Figure 23. Case 7

7 (33.09%) 4.37% 6.41% 6.93% 32.15% 31.12% 30.00% 30.00% 18.34% 24.25% 23.77% 23.77%
Difference from SA 0.67% 1.32% 2.00% 2.00% (1.10%) (2.17%) (3.29%) (3.29%) (0.44%) (1.32%) (2.00%) (2.00%)
Case 8 – Case 8 examines a scenario with the aggressive sales growth, a small change to gross
margin, and aggressive improvement to operating expense.
Figure 24. Case 8

8 (32.76%) 5.03% 7.41% 7.93% 32.15% 31.12% 30.00% 30.00% 18.12% 23.59% 22.77% 22.77%
Case 18 – Case 18 sees small sales growth, small changes to gross margin, and moderate
operating expense improvement.
Figure 25. Case 18

18 (33.43%) 3.71% 5.41% 5.93% 32.15% 31.12% 30.00% 30.00% 18.34% 24.25% 23.77% 23.77%
53
Case 19 – Finally, case 19 sees moderate sales growth, small gross margin deterioration, and
aggressive operating expense improvement.
Figure 26. Case 19

19 (33.09%) 4.37% 6.41% 6.93% 32.15% 31.12% 30.00% 30.00% 18.12% 23.59% 22.77% 22.77%
54
Chapter 10
Conclusion
After reviewing all of the accretive scenarios, there are a few similarities that help determine the
central question of this paper: Under what scenarios is Amazon’s acquisition of Whole Foods accretive?
One important thing to note is that gross margins must either stay constant or experience only a
marginal decline to be an accretive transaction. Additionally, setting aside the standalone case, there are
some other conclusions that can be drawn. If there is a gross margin decline there needs to be a decline in
operating expense to help contrast this.
Looking at the most accretive case, case 4, Amazon should theoretically hold margins constant
(or lower prices and improve supplier agreements), and grow traffic, and therefore revenue, through a
combination of added store value (lockers, Amazon products), marginal price cuts, cross platform selling,
and increased marketing. Finally, Amazon should look to aggressively improve operating expenses
through increased automation, supply chain aggregation, and consolidated back office functions.
When comparing this to my original thesis, which assumed that moderate to aggressive revenue
growth was needed in combination with moderately declining gross margins, and significant operating
expense synergies, the paper’s initial hypothesis was somewhat incorrect3 considering that there are
accretive scenarios with marginal sales growth and marginal operating expense improvements.
55
Appendix A
Acquisition Synergy Cases
Acquisition Synergy Cases

Scenario Revenue Growth Gross Margin Opex as % of Sales
Case Case 2017 2018 2019 2020 Case 2017 2018 2019 2020 Case 2017 2018 2019 2020
1 1 (34%) 3% 4% 5% 1 33% 33% 33% 33% 1 19% 26% 26% 26%
2 2 (33%) 4% 5% 6% 1 33% 33% 33% 33% 2 19% 25% 25% 25%
3 3 (33%) 4% 6% 7% 1 33% 33% 33% 33% 3 18% 24% 24% 24%
4 4 (33%) 5% 7% 8% 1 33% 33% 33% 33% 4 18% 24% 23% 23%
5 1 (34%) 3% 4% 5% 2 32% 31% 30% 30% 1 19% 26% 26% 26%
6 2 (33%) 4% 5% 6% 2 32% 31% 30% 30% 2 19% 25% 25% 25%
7 3 (33%) 4% 6% 7% 2 32% 31% 30% 30% 3 18% 24% 24% 24%
8 4 (33%) 5% 7% 8% 2 32% 31% 30% 30% 4 18% 24% 23% 23%
9 1 (34%) 3% 4% 5% 3 31% 30% 28% 28% 1 19% 26% 26% 26%
10 2 (33%) 4% 5% 6% 3 31% 30% 28% 28% 2 19% 25% 25% 25%
11 3 (33%) 4% 6% 7% 3 31% 30% 28% 28% 3 18% 24% 24% 24%
12 4 (33%) 5% 7% 8% 3 31% 30% 28% 28% 4 18% 24% 23% 23%
13 1 (34%) 3% 4% 5% 4 31% 29% 26% 26% 1 19% 26% 26% 26%
14 2 (33%) 4% 5% 6% 4 31% 29% 26% 26% 2 19% 25% 25% 25%
15 3 (33%) 4% 6% 7% 4 31% 29% 26% 26% 3 18% 24% 24% 24%
16 4 (33%) 5% 7% 8% 4 31% 29% 26% 26% 4 18% 24% 23% 23%
17 1 (34%) 3% 4% 5% 2 32% 31% 30% 30% 2 19% 25% 25% 25%
18 2 (33%) 4% 5% 6% 2 32% 31% 30% 30% 3 18% 24% 24% 24%
19 3 (33%) 4% 6% 7% 2 32% 31% 30% 30% 4 18% 24% 23% 23%
20 4 (33%) 5% 7% 8% 2 32% 31% 30% 30% 2 19% 25% 25% 25%
21 1 (34%) 3% 4% 5% 3 31% 30% 28% 28% 3 18% 24% 24% 24%
22 2 (33%) 4% 5% 6% 3 31% 30% 28% 28% 4 18% 24% 23% 23%
23 3 (33%) 4% 6% 7% 3 31% 30% 28% 28% 2 19% 25% 25% 25%
24 4 (33%) 5% 7% 8% 3 31% 30% 28% 28% 3 18% 24% 24% 24%
25 1 (34%) 3% 4% 5% 4 31% 29% 26% 26% 4 18% 24% 23% 23%
26 2 (33%) 4% 5% 6% 4 31% 29% 26% 26% 2 19% 25% 25% 25%
27 3 (33%) 4% 6% 7% 4 31% 29% 26% 26% 3 18% 24% 24% 24%
28 4 (33%) 5% 7% 8% 4 31% 29% 26% 26% 4 18% 24% 23% 23%
29 1 (34%) 3% 4% 5% 3 31% 30% 28% 28% 3 18% 24% 24% 24%
30 2 (33%) 4% 5% 6% 3 31% 30% 28% 28% 4 18% 24% 23% 23%
31 3 (33%) 4% 6% 7% 3 31% 30% 28% 28% 3 18% 24% 24% 24%
32 4 (33%) 5% 7% 8% 3 31% 30% 28% 28% 4 18% 24% 23% 23%
33 1 (34%) 3% 4% 5% 4 31% 29% 26% 26% 3 18% 24% 24% 24%
34 2 (33%) 4% 5% 6% 4 31% 29% 26% 26% 4 18% 24% 23% 23%
35 3 (33%) 4% 6% 7% 4 31% 29% 26% 26% 3 18% 24% 24% 24%
36 4 (33%) 5% 7% 8% 4 31% 29% 26% 26% 4 18% 24% 23% 23%
37 1 (34%) 3% 4% 5% 4 31% 29% 26% 26% 4 18% 24% 23% 23%
38 2 (33%) 4% 5% 6% 4 31% 29% 26% 26% 4 18% 24% 23% 23%
39 3 (33%) 4% 6% 7% 4 31% 29% 26% 26% 4 18% 24% 23% 23%
40 4 (33%) 5% 7% 8% 4 31% 29% 26% 26% 4 18% 24% 23% 23%
56
Appendix B
Yearly Accretion or Dilution
Earnings Accretion
Case Q3 - Q4 2017E 2018E 2019E 2020E
$ % $ % $ % $ %
1 $0.64 17% $0.05 0% $0.18 1% $0.34 2%
2 0.68 18% 0.22 2% 0.44 3% 0.63 3%
3 0.72 19% 0.39 3% 0.72 4% 0.94 4%
4 0.77 20% 0.57 5% 1.01 6% 1.27 6%
5 0.51 14% (0.43) (4%) (0.57) (4%) (0.43) (2%)
6 0.55 15% (0.27) (2%) (0.32) (2%) (0.16) (1%)
7 0.59 16% (0.10) (1%) (0.06) (0%) 0.13 1%
8 0.64 17% 0.07 1% 0.22 1% 0.43 2%
9 0.44 11% (0.73) (6%) (1.03) (6%) (0.89) (4%)
10 0.48 13% (0.57) (5%) (0.78) (5%) (0.64) (3%)
11 0.52 14% (0.41) (3%) (0.53) (3%) (0.36) (2%)
12 0.56 15% (0.24) (2%) (0.27) (2%) (0.08) (0%)
13 0.37 10% (0.98) (8%) (1.41) (9%) (1.29) (6%)
14 0.41 11% (0.82) (7%) (1.18) (7%) (1.05) (5%)
15 0.45 12% (0.66) (6%) (0.94) (6%) (0.79) (4%)
16 0.49 13% (0.50) (4%) (0.68) (4%) (0.51) (2%)
17 0.54 14% (0.29) (2%) (0.34) (2%) (0.19) (1%)
18 0.58 15% (0.12) (1%) (0.09) (1%) 0.08 0%
19 0.62 16% 0.05 0% 0.18 1% 0.38 2%
20 0.58 15% (0.24) (2%) (0.27) (2%) (0.08) (0%)
21 0.49 13% (0.43) (4%) (0.57) (4%) (0.43) (2%)
22 0.53 14% (0.27) (2%) (0.32) (2%) (0.16) (1%)
23 0.49 13% (0.56) (5%) (0.77) (5%) (0.61) (3%)
24 0.53 14% (0.39) (3%) (0.51) (3%) (0.33) (2%)
25 0.45 12% (0.54) (5%) (0.73) (5%) (0.59) (3%)
26 0.41 11% (0.82) (7%) (1.18) (7%) (1.05) (5%)
27 0.45 12% (0.66) (6%) (0.94) (6%) (0.79) (4%)
28 0.49 13% (0.50) (4%) (0.68) (4%) (0.51) (2%)
29 0.49 13% (0.43) (4%) (0.57) (4%) (0.43) (2%)
30 0.53 14% (0.27) (2%) (0.32) (2%) (0.16) (1%)
31 0.52 14% (0.41) (3%) (0.53) (3%) (0.36) (2%)
32 0.56 15% (0.24) (2%) (0.27) (2%) (0.08) (0%)
33 0.42 11% (0.69) (6%) (0.96) (6%) (0.82) (4%)
34 0.46 12% (0.53) (5%) (0.72) (4%) (0.57) (3%)
35 0.45 12% (0.66) (6%) (0.94) (6%) (0.79) (4%)
36 0.49 13% (0.50) (4%) (0.68) (4%) (0.51) (2%)
37 0.45 12% (0.54) (5%) (0.73) (5%) (0.59) (3%)
38 0.46 12% (0.53) (5%) (0.72) (4%) (0.57) (3%)
39 0.47 12% (0.51) (4%) (0.70) (4%) (0.54) (3%)
40 0.49 13% (0.50) (4%) (0.68) (4%) (0.51) (2%)
57
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Academic Vita of Alanna Harding
Alannaharding18@gmail.com
EDUCATION
The Pennsylvania State University | The Schreyer Honors College University Park, PA
Smeal College of Business | Bachelor of Science in Finance Class of December 2017
Sapphire Leadership Organization
RELEVANT EXPERIENCE
Bank of America Merrill Lynch New York, NY
Investment Banking Summer Analyst | Mergers & Acquisitions Jun 2017 – Aug 2017
 Performed merger model, discounted cash flow, precedent transaction, trading comparable and other relevant analyses
across multiple industries for live M&A transactions, amongst other situations
Selected Relevant Transaction Experience
Co-Advisor to Bayer on a sell side transaction integral to the completion of its ~$66 billion acquisition of Monsanto
(announced)
 Drove the preparation of a Confidential Information Memorandum for an asset divestiture worth ~$2.5 billion, by
coordinating with the client to effectively communicate the complex business story to potential strategic and financial
buyers
 Coordinated with teams in New York, Frankfurt, and Canada to assemble comprehensive materials and communicate
with bidders
Developed comprehensive pitch for a ~$15 billion paper and packaging client detailing three potential acquisition targets
 Built the standalone financial model for the acquirer, created merger model analyses for three targets ranging from ~$5
billion to ~$10 billion in size, and developed presentation slides as the lead M&A analyst on the deal team
Goldman, Sachs & Co. New York, NY
Securities Division Summer Analyst Jun 2016 – Jul 2016
 Rotated on the GSS Risk desk and the Goldman Sachs Electronic Trading desk in an 8-week rotational program while
learning about the broader securities division through networking with professionals across the FICC, Equity, and
Prime Services divisions
 Created an analysis of Eris CDX credit futures versus the underlying CDX indices to determine the additional level of
risk that the future contracts carry relative to the indices in order to determine the margin that the GSS Risk desk
should charge clients to trade
 Analyzed T. Rowe Price’s algorithmic order flow from June 20th to June 24th in order to recommend different potential
customizations for their algorithm usage and created a presentation with the analysis in order to give a mock
presentation to members of the desk
Nittany Lion Fund, LLC University Park, PA
Secretary, Executive Board Jan 2017 – Present
 Manage the Nittany Lion Fund, a $7.0 million student-run hedge fund consisting of 36 fund managers and 65 stocks,
attempting to outperform the S&P 500 through superior stock selection while maintaining active positions in all 11
sectors of the S&P 500
 Serves on the 5-member executive board in order to oversee the 36-member Nittany Lion Fund and develop and
execute upon the financial, recruitment, and professional goals of the organization
Lead Analyst, Consumer Discretionary Sector Dec 2015 – Dec 2016
 Collaborated with two associate analysts to manage the Consumer Discretionary Sector worth $900,000 by generating
investment ideas and evaluating potential investments using DCF models and public multiples
Lead Analyst, Telecommunications Sector Jan 2015 – Dec 2015
 Issued weekly and earnings reports regarding the holdings of the Telecommunications Sector worth $164,000 while
leading an associate
Harvard University Stock Pitch Competition Cambridge, MA
Participant Oct 2016
 Created a stock pitch detailing the long case for Whole Foods Market by collaborating with 3 teammates to develop an
original thesis and valuation for the Company. Presented the investment case to financial professionals while
competing against ~20 teams
LEADERSHIP EXPERIENCE
Penn State Dance Marathon | Donor Alumni Relations University Park, PA
Committee Member Sep 2016 – Feb 2017
 Worked in a team of 35 students to raise money for the largest student run philanthropy in the world, Penn State Dance
Marathon (THON)
Fire Department of New York City New York, NY
Leadership Training Participant Apr 2016
 Engaged in a one-day training program with leaders of the FDNY at Randall’s Island, the main training center for the
department
 Participated in high pressure mental and physical team exercises with minimal guidance in order to test leadership
instincts and instill leadership lessons such as communication, delegation, and the importance of understanding an
objective

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THE PENNSYLVANIA STATE UNIVERSITY

SCHREYER HONORS COLLEGE

ACCRETION ANALYSIS OF THE AMAZON – WHOLE FOODS ACQUISITION

ALANNA ROSE HARDING

Reviewed and approved* by the following:

* Signatures are on file in the Schreyer Honors College.

The purpose of this paper is to analyze Amazon.com’s acquisition of Whole Foods

determined by the potential synergies associated with the transaction.

LIST OF FIGURES ..................................................................................................... iii

LIST OF TABLES ....................................................................................................... iv

Chapter 1 Overview ..................................................................................................... 1

A Brief Overview of Amazon.com & Whole Foods ........................................................ 2

Chapter 2 Historical Review of M&A Deal Pricing .................................................... 5

Valuation Methods ........................................................................................................... 5

Chapter 3 Amazon Strategic Review ........................................................................... 12

Chapter 4 Whole Foods Strategic Review and Assessment ........................................ 15

Chapter 5 Review of Deal Structure and Timeline ...................................................... 18

Timeline of Events Leading to Sale ................................................................................. 18

Chapter 6 Overview of Media & Analyst Coverage of the Deal ................................. 23

Prime Pantry & Prime Fresh ............................................................................................ 23

Chapter 7 Review of Amazon’s Initial Strategy Shifts ................................................ 29

Chapter 8 Methodology ............................................................................................... 35

Experience and Methodology Preface.............................................................................. 35

Amazon.com Operating Model Assumptions .................................................................. 36

Chapter 9 Case Analysis and Accretion Output .......................................................... 48

Accretion Output .............................................................................................................. 50

Chapter 10 Conclusion ................................................................................................. 54

Appendix A Acquisition Synergy Cases..................................................................... 55

Appendix B Yearly Accretion or Dilution .................................................................. 56

Figure 1. Public Market Information ....................................................................................... 1

Figure 2. Public Market Reactions to Whole Foods Acquisition............................................. 2

Figure 3. Amazon Share Price ................................................................................................. 13

Figure 2. Share Reactions in the Month Surrounding the Announcement............................... 18

Figure 5. Whole Food Share Price ........................................................................................... 21

Figure 6. Change in Price at Whole Foods Location ............................................................... 30

Figure 7. Competitive Price Landscape ................................................................................... 31

Figure 8. Changes in the Food Prices Industry Wide .............................................................. 32

Figure 9. Amazon.com Wall Street Research Estimates ...................................................... 38

Figure 10. Amazon Operating Model Summary ...................................................................... 39

Figure 12. Calenderization ....................................................................................................... 42

Figure 13. Whole Foods Market Operating Model .................................................................. 43

Figure 14. Debt Issuance and Sources and Uses ...................................................................... 45

Figure 15. New Goodwill Calculation ..................................................................................... 46

Figure 16. Combined Income Statement.................................................................................. 47

Figure 17. Case Outline ........................................................................................................... 49

Figure 15. Total Accretion for Each Case................................................................................ 50

Figure 19. Case 1 ..................................................................................................................... 51

Figure 20. Case 2 ..................................................................................................................... 51

Figure 21. Case 3 ..................................................................................................................... 51

Figure 22. Case 4 ..................................................................................................................... 52

Figure 23. Case 7 ..................................................................................................................... 52

Figure 24. Case 8 ..................................................................................................................... 52

Figure 25. Case 18 ................................................................................................................... 52

Figure 26. Case 19 ................................................................................................................... 53

feedback throughout this process.

Harding – whose support of my academic endeavors has pushed me to where I am today.

Figure 1. Public Market Information

intention simply by looking at Amazon.com’s history as a company.

Figure 2. Public Market Reactions to Whole Foods Acquisition

Grocery Industry Peer Set Price Reactions

Kroger Co. Sprouts Farmers Markets, Inc.

A. A Brief Overview of Amazon.com & Whole Foods

worked until he founded Amazon.com.5