Could Kroger buy out Whole Foods?

Industry speculation that Kroger is mulling a takeover of Whole Foods Market took stock in both companies on a wild ride this week.

The ailing Austin, Texas-based chain of natural foods supermarkets saw its shares jump 4.9 percent on Thursday. During Thursday's trading session, four times the average number of shares changed hands, often a reflection of increased demand for the stock. Kroger shares also climbed 1.8 percent in healthy trading as well.

By Friday, shares in both companies settled down. Shares in Whole Foods closed down 1.6 percent at $28.86 and shares in Kroger declined 1.3 percent to $29.

Officials from Downtown Cincinnati-based Kroger officials declined to discuss "rumors and speculation" regarding a potential deal when reached on Thursday. Whole Foods also declined comment.

Analysts reached by The Enquirer said a Kroger-Whole Foods deal would be intriguing, but they were skeptical the two chains were pursuing a flashy merger amid falling food prices and increased competition. If a transaction occurred, it would be the most expensive in the U.S. industry since beleaguered Albertson's was bought for $16.1 billion a decade ago and later split apart.

Published reports said Kroger was considering a $40 per share bid for Whole Foods – an offer that would spell out a $13 billion takeover.

Kroger has been disciplined not to buy anything too big or for too much money in its string of acquisitions in the last three years, analysts said.

"It's risky given the state of the industry," Oppenheimer analyst Rupesh Parikh said. He noted food deflation was sapping sales for supermarkets. Also, Parikh said a large distracting takeover by Kroger could snap the company's 12-year winning streak of growing individual store sales excluding fuel, a closely-watched measure of market share growth.

Last month, Kroger reported quarterly sales that fell just below Wall Street expectations. The company blamed falling food prices and also cut its capital expenditure forecast for this year – excluding acquisitions – by $500 million.

In a Friday note to investors, Citi analyst Alvin Concepcion threw cold water on enthusiasm behind a potential merger.

"While Whole Foods Market could complement the Kroger portfolio, we believe there are challenges that reduce the likelihood and could be uncharacteristic for Kroger," Concepcion wrote.

A Whole Foods takeover would possibly trump Kroger's $12.6 billion merger with Fred Meyer in the late 1990s, which transformed Kroger into the nation's largest traditional supermarket chain. But Kroger did not make another major acquisition until the $2.5 billion Harris Teeter takeover in 2014. Today, Kroger is the world's third-largest retailer.

Analysts believe Kroger has walked away from deals that looked too pricey. Kroger was reportedly one of a handful of interested bidders for North Carolina's The Fresh Market, according to Reuters. The Fresh Market was ultimately acquired in April by Apollo Global Management for $1.3 billion.

But if Kroger did buy Whole Foods, the grocery store operator could gain a foothold in markets where it has no stores. Whole Foods is the No. 4 player in Boston, No. 5 in San Francisco, No. 6 in Miami and a top 10 operator in New York City and Washington, D.C., according to industry tracker Chain Store Guide. Whole Foods would also bolster Kroger's market share in major metro markets such as Chicago, Denver and Los Angeles.

Analysts say Whole Foods' industry leadership in prepared foods would be a coveted asset for Kroger. The Cincinnati company typically looks for strong-performing rivals with special abilities that can be copied and deployed throughout its footprint in its purchase decisions.

Whole Foods stock has lost more than half its value since 2013 as growth slowed dramatically for a retailer that became an industry darling for its double-digit annual sales growth. Sales are up 3 percent in the last 12 months to $9.4 billion, according to Bloomberg. Annual profits have been stuck between $550 million and $580 million for the last three years.

Analysts say Whole Foods is a strong player that has reached turning point: Whole Foods' woes stem from traditional supermarkets adapting to consumer demand for natural and organic foods as well as upscale prepared meals that were a hallmark of the chain.

Although Parikh is doubtful a deal will occur, he said if Kroger were to make the acquisition, Whole Foods would remain a standalone brand. It is also unlikely Kroger would be selling Whole Foods merchandise and Whole Foods would sell Kroger's private label items, he said.

But one thing Kroger would borrow is Whole Foods' prepared foods know-how, Parikh said. Kroger could also lend its loyalty card insights to the Texas chain, which only recently launched a loyalty card program.

Kroger has moved aggressively embrace and sell more natural and organic foods in the past few years. The company's Simple Truth house brand of natural and organic products, which launched in 2012, has topped $1 billion in sales.

In 2014, Kroger completed a $2.5 billion takeover of North Carolina's Harris Teeter and bought online health retailer Vitacost.com for $280 million. In December 2015, it bought Wisconsin-based grocery chain Roundy's Inc. for $800 million. The purchases of the grocery store chains added $8 billion to Kroger's total sales that now exceed $100 billion annually. Earlier this year, it acquired an undisclosed stake in Lucky's Market, a Colorado-based chain of organic stores.

In the deals to buy Roundy's and Harris Teeter, Kroger paid about seven times the cash flow those chains produced. That math suggests the price tag for Whole Foods could be about $9.7 billion.

Whole Foods operates 439 U.S. stores including ones in Norwood and Mason, as well as 11 in Canada and nine in the United Kingdom. The company plans to open Ohio's first 365 by Whole Foods store in Sycamore Township at the Kenwood Collection development next year.