Whole Foods' Un-Appealing Wild Oats Ride

Some Wild Oats stores are already closed. Or under renovation for transitioning to new Whole Foods concepts. The hit on financials has already been taken, as Whole Foods has charted the drag the acquisition costs have had on financial results, on top of the slowing economy. The opportunity to increase prices to this niche organic and natural food segment that FTC said would happen? Not likely when the grocery chain is facing depressed comps and an uncertain economy, in which consumers are pinching their food-shopping pennies.

Still, after federal judge Paul Friedman cleared the way for Whole Foods to acquire Wild Oats, ruling Whole Foods now competes with the major mainstream grocery chains on organic and natural foods and that marginal customers would still be able to find choice among all the grocers, Whole Foods "closed" the acquisition. Now, almost a year later, a three-member panel of judges from the U.S. Court of Appeals in Washington has ruled (2-1) that Friedman was too hasty in his decision to forgo the FTC's injunction request.

Is this simple checks-and-balances or a government determined to stand in the way of business progress (a la Microsoft)?

For its part, the panel said Friedman's focus on marginal customers was misplaced, as there is a substantial core of natural/organic customers that would be affected and should not have been ignored. On the other hand, the panel blasted FTC for its weak evidence in its injunction request. To me the most telling part of the panel's decision is the one dissenting judge's concern that his fellow judges are attempting to "un-ring the bell."

Also, what makes core customers more susceptible to choice restriction than marginal customers? Don't all shoppers for organic and natural products make a choice to shop at Whole Foods, Target, Wal-Mart, Trader Joe's or, gasp, even their local co-op or independent health food store? Evidence (see: Whole Foods 3Q report and future outlook) shows this under-protective core customer is not as loyal to Whole Foods as FTC thought. Funny what $4/gallon gas and rampant foreclosures will do to people.

Seems like the judge panel is giving FTC a "do over," so it can maybe present some better evidence. Kind of like a retired one-time NFL star quarterback wanting a "do over" on retirement. Sometimes the bell has tolled.

Given the negative impact the Wild oats acquisition has had on Whole Foods results and share performance, you almost wonder if Whole Foods CEO John Mackey and company wish this re-opening of the anti-merger case happened before the great Wild Oats integration (especially given his personal embarrassment during the case).

But what happens now? Nobody seems to know for sure. Some experts suggest Whole Foods will need to halt its integration of Wild Oats, freezing the closing and transition plans for several stores. Some say Whole Foods shares will re-energize if it has to offload Wild Oats. What about the money it paid for Wild Oats? Is it Whole Foods' fault they were cleared to move forward? What about any money Wild Oats (or shareholders) received?

Scott Van Winkle, an analyst with Canaccord Adams, doesn't think FTC is trying to wreckthe Whole Foods-Wild Oats marriage. Instead, he speculated FTC could be trying to fix the precedent the case set last year, in hopes it helps with any future merger cases that are similar to the Whole Foods-Wild Oats deal. He also hinted another possibilitiy is FTC has thorn in its side from Mackey. Their airing his dirty laundry last year, including Mackey's stealthy online chatting, is some indication such a vendetta is possible. At this point, anything is possible, and no one knows how it will play out.

This seems very messy, although Whole Foods contends its business as usual for them until something is decided. Still, I'm sure there is some panic and frantic discussion going on over some organic wine and beer in Austin.