| Whole Foods location in New York (photo credit: Mark Kauzlarich/Bloomberg) |
Amazon’s deal to acquire Whole Foods Market for $42 per share in cash, or $13.7 billion, is a home run for Barry Rosenstein’s JANA Partners, the activist hedge fund firm that earlier this year publicly urged the company to take a series of steps to boost its valuation.
The deal also offers some critical reminders and lessons for those who like to follow the exploits of activist investors, which is sometimes like following your favorite sports team.
Shares of Whole Foods surged about 27 percent on Friday, to around $42, roughly in line with the deal’s price tag and a huge premium to what JANA had paid for the stock. JANA started buying its shares in early February, mostly paying in the upper $20s to low $30s by the time it filed its 13D with regulators announcing its 8.3 percent stake on April 10. As a result, JANA has made more than 33 percent on its investment in just a few months.
The deal also enhances JANA’s turnaround. The firm, which was in losing territory for the first half of last year, had posted profits in 11 straight months until it suffered a small loss in May. As of the end of May its main funds had gained 4.6 percent for the year.
This is also the first big victory for an activist hedge fund after several of these managers publicly endured a few recent setbacks or frustrations. For example, two weeks ago David Einhorn’s Greenlight Capital lost its proxy fight with General Motors and failed to convince shareholders they are better off breaking the company’s stock into two separate stocks. Around the same time, Paul Singer’s Elliott Management lost a legal battle to remove AkzoNobel’s chairman.
On the other hand, Mick McGuire’s Marcato Capital Management recently won its proxy fight with Buffalo Wild Wings, placing three of four of its nominees on the board of directors. This is so far a hollow victory, however. Shares of the casual dining chain fell on Friday and are now trading below $140 per share. This is down about 15 percent from its high in April.
Keep in mind that Marcato paid in the low $140s for the common stock it bought mostly in late June 2016. It also acquired shares from exercising options.
Of course, Marcato’s heavy lifting has only begun now that it can exert influence on the board. In one of its filings, Marcato asserted the stock could be worth closer to $400 per share in four years if its director nominees were approved. Now the company, with the help of its new board members, needs to execute — which several Wall Street analysts think will be a difficult task over the short haul at least. Even so, McGuire’s offshore fund, Marcato International, had gained 8 percent through May, better than most activists.
The Whole Foods deal, however, is a reminder that if an activist wants to see a quick return on its investment, it is best to put the target company in play and seek or hope for a buyer to step in.
Securing a few board seats often leads to a higher valuation down the road. But the activist’s nominees must hope their plan or insights improve the company. This is never a certainty.
Meanwhile, JANA’s investment in Whole Foods and Marcato’s investment in Buffalo Wild Wings are also reminders that it is hard for outsiders to track activist filings to discern their next target and get in on the stock before it pops following a public disclosure of an activist stake.
For example, Marcato started buying its shares of Buffalo Wild Wings in late June of last year. When it finally had to file its 13D indicating it owned at least 5 percent of the shares, on July 25, it was still three weeks before it was required to file its 13F detailing its second-quarter holdings.
JANA filed its 13D for Whole Foods on April 10, several days before it had to detail its first-quarter holdings. The timing of these events is not coincidental.
