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Amazon Is Seeking $16 Billion Bond Sale For Whole Foods (bloomberg.com)

Posted by BeauHD on from the supermarket-business dept.

An anonymous reader quotes a report from Bloomberg: Amazon is turning to the debt markets to fund the $13.7 billion acquisition of Whole Foods and power Jeff Bezos's planned conquest of the supermarket business. The world's largest online retailer is selling $16 billion of unsecured bonds in as many as seven parts, according to a person with knowledge of the matter. In a sign of market interest, the longest portion of the offering, a 40-year security may yield 1.45 percentage points above Treasuries, down from initial talk of 1.6 percentage points to 1.65 percentage points, said the person, who asked not to be identified as the deal is private. The sale marks the first bond-market foray since 2014 for Amazon and will support the purchase of the organic-food chain, according to a company statement. The partnership, which rattled the grocery world when announced in June, is expected to reduce prices at Whole Foods, an iconic yet struggling high-end grocery trying to lure more low- and middle-income shoppers. The deal could intensify a price war in an industry beset by razor-thin margins and persistent deflation.

46 comments

  1. Unsecured bonds by Anonymous Coward · · Score: 3, Insightful

    AKA "free money from suckers"

    1. Re:Unsecured bonds by Anonymous Coward · · Score: 0

      Yep ... a fool and his money are soon parted.

      Bonds are a great way to make an "potentially unprofitable acquisition" worth it for the company that "takes ownership" of the acquisition target. If the acquisition fails to "gain traction" in the marketplace (it flops or becomes decidedly unprofitable), simply sell off the debt-laden entity to someone else and be done with it.

      Bezos is $$ smart like most rich people that want to keep their wealth intact. He does not gamble with his own money; he makes other people gamble with their own money.

  2. Counterfeit food by Anonymous Coward · · Score: 0

    Great

  3. Well this is odd by Anonymous Coward · · Score: 0

    So if you are buying a company you usually have the cash on hand, get a bank loan or give stock from the main company to the people that own the company that is being acquired. Considering how much is costs to acquire Whole Foods it wouldn't be considered odd to get the funding from a bond sale. The unusual thing is that Amazon doesn't have the cash to do this or is able to get a loan.

    A bond sale in theory would have lower interest rates than a bank loan but this would be a $16 billion loan. As odd as this sounds, interest rates are in the zero-to-negative range for large banks, unless the loan contract had a renegotiation clause the interest on this could be almost zero. So why is Amazon going with this route?

    1. Re:Well this is odd by Fly+Swatter · · Score: 3, Insightful

      So why is Amazon going with this route?

      Between this and Tesla's junk bond story not long ago, i'm thinking there are some junk bond shenanigans currently going on in the banking industry that makes things like this lucrative for the seller.

    2. Re:Well this is odd by ClickOnThis · · Score: 2

      16 billion is one big whack of cash. I doubt that a single bank would be willing or able to take on that kind of risk out of their own capital.

      So, Amazon goes to the bond market, which is much larger than any bank, or even the entire US stock market (in fact it is twice the size of the stock market in capitalization.)

      As for not issuing Amazon stock to the current Whole Foods stock-holders, perhaps they fear a dilution, or don't want to influence governance as a result of all those new voting shares. There is an interesting viewpoint on the Motley Fool website. TL/DR: If Amazon is confident about the success of the deal, it makes more sense to use cash. If it is not, then it makes sense to use stock, so that they share the risk with the erstwhile Whole Foods shareholders. Also, Amazon may think that Whole Foods is undervalued, so it makes more sense to use cash.

      --
      If it weren't for deadlines, nothing would be late.
    3. Re:Well this is odd by alvinrod · · Score: 1

      I don't think it's overly fishy as both Amazon and Tesla aren't bringing in much money and have a lot of their value based on potential future returns. I think only recently did Amazon have a net profit over the history of the company because they were taking losses for such a long time or constantly reinvesting a lot of their revenue into new ventures. Tesla is even earlier in the same type of path and I'm not even sure if they've had any profitable quarters.

    4. Re:Well this is odd by slew · · Score: 1

      FWIW, most commercial debt is rotated on 5 year basis subjecting it to interest rate risk, but the bond terms are more varied (Amazon are issuing 3 year to 40 year bonds). Also, most banks really can't make a $16B loan (they don't generally have charter to take that kind of singleton risk). There are private equity groups that do amounts this large, but they generally want equity stake in exchange for loaning the money. On the the other hand, you can think of a bond offering as distributing the risk among the holders which is similar, but w/o the equity stake.

      The zero-to-negative interest rate is for having the bank *hold* your money, the bank will always charge for lending money (the spread is how they make money) although having to pay less for money allows them to lend it out at a lower rate. Unfortunately, this anti-deflationary stance is mostly responsible for modifying inter-bank lending behavior rather than any other effect relating to business loans.

      However, the reason they probably went with a bond issue is that given the relatively historically low interest rates, it makes the most sense to go the bond route (to lock it in as long as possible) so they can save their cash for something Bezos like best: spending it on expansion.

    5. Re:Well this is odd by Eustace+Tilley · · Score: 1

      Do you think you can get a forty-year loan from a bank?

  4. Use your cash pile you tax avoiding shits by Anonymous Coward · · Score: 0

    Hey Amazon. How about you pay some fucking tax, and use some of that $26 billion you're hoarding offshore, rather than issuing more debt?

  5. Call me crazy by 93+Escort+Wagon · · Score: 3, Interesting

    I've bought a lot of stuff from amazon.com. But, during the past few months, I've started thinking about whether I should intentionally start patronizing other businesses - both online and offline - when I want to shop for things I would normally buy from Amazon.

    Thing is, it's hard to beat the convenience - and it seems like the companies which can more or less match that level of convenience are also humongous companies in their own right.

    --
    #DeleteChrome
    1. Re:Call me crazy by Anonymous Coward · · Score: 0

      You should. Best case you don't get your nuts blown to bits by counterfeit batteries

    2. Re:Call me crazy by DigiShaman · · Score: 1

      Nothing beats AutoZone and O'Reilly Auto Parts. Did the whole car-part purchasing from Amazon, ended in fail. Did you know that regardless of make/model, brake rotor size depends on if the car was manufactured in Japan or not? Yup, only the VIN will tell you that (or you measure the part directly), and Amazon doesn't have a way of filtering based on that either. At least locally, you can return the part that day and swap in time to finish the job.

      --
      Life is not for the lazy.
    3. Re:Call me crazy by Anonymous Coward · · Score: 0

      The eNutcracker

    4. Re:Call me crazy by HornWumpus · · Score: 1

      NAPA, generally better parts, same price...all the parts stores dropped their margins (particularly their retail, burn, markup) a ton on when Amazon got into the parts business bigtime. Used to be a x2 factor vs jobber pricing, now it's about 20%.

      Your issue with brake rotors isn't universal, likely just some models of Hondas. BTW you always want the big ones, replace the calipers too, if you have to. You should know where your Honda is from anyhow. Granting the new, American made, Hondas aren't as bad as they used to be.

      --
      John McAfee 'It was like that time I hired that Bangkok prostitute; to do my taxes, while I fucked my accountant'
    5. Re:Call me crazy by Anonymous Coward · · Score: 3, Interesting

      Hi,

      I used to have Amazon Prime and order from there regularly. No complaints but I cancelled just for the f* of it. Why be tied to one retailer? Plus I don't believe Amazon is the cheapest nor the best. That would be BHPhotoVideo, if they have what I'm looking for.

      My main stores, in order, are:
      1- BHPhotoVideo
      2- Walk-in stores: Target, Frys, Walmart
      3- Amazon
      4- Walmart.com

      For not having prime, Amazon seems to "punish" me by adding extra shipping delays. But that only makes me appreciate the other stores, which don't do that, even more.

      I like Amazon. I just don't think it's that exceptional anymore.

    6. Re:Call me crazy by Presence+Eternal · · Score: 3, Interesting

      Amazon torques me off from time to time, but as of right now they're simply too good for me to go anywhere else. The store card is 5% back on all purchases, and they tend to already have the best price, or a good price factoring in not having to go for a drive in a rural area where the grocery store is 20 minutes away. On top of that no rush shipping bonus is usually good towards ebooks that I'd be paying for anyway, so that's like an extra buck off almost every purchase. Even ebay sellers rarely compete well vs Amazon except for ultra cheap stuff straight from Hong Kong. Their only real failure is they are incompetent at vetting reviews, and that forces me to vet every single product on fakespot.com.

    7. Re:Call me crazy by Applehu+Akbar · · Score: 1

      I've bought a lot of stuff from amazon.com. But, during the past few months, I've started thinking about whether I should intentionally start patronizing other businesses - both online and offline - when I want to shop for things I would normally buy from Amazon

      At times I have wondered about this myself. But when I compare being able to click on a website for a product that magically shows up on my doorstep two days later as opposed to visiting the closest comparable meatspace stores 100 miles away to the south or 65 miles to the west down a twisty road across a 7000' mountain pass, I say "Naaaah."

    8. Re:Call me crazy by Anonymous Coward · · Score: 0

      And as an added bonus, Amazon now knows what car you drive!

      Of all the cars I've ever owned, I've purchased parts on Amazon for one of them. I haven't owned it in many years, yet I am frequently getting phone calls trying to sell me an extended warranty on it (I must have 40 or 50 blocked numbers in my phone just from extended warranties). Coincidence? Yeah, I'm sure.

    9. Re:Call me crazy by aaarrrgggh · · Score: 1

      Says someone who shops at Fry's...

      I recently realized it was too late to get something from Amazon, so I checked online to see if Frys had what I needed and would run down the street to pick it up. However, the dread of shopping there pushed me into the Apple Store (at a lower price) instead.

      It is kind of a shame that they are stuck in the 80's with their mindset, but the store near me will be closing within a couple years.

      Some of them might be nicer, but it is t what I would call an exceptional experience. I will be sad for the random electronics bits to disappear though.

    10. Re:Call me crazy by Anonymous Coward · · Score: 0

      Your issue with brake rotors isn't universal, likely just some models of Hondas.

      The only time I've run into this was on a Lexus model, the IS. The IS250, IS350, and ISF are different variants of the same model but the IS350 has bigger brake rotors and calipers front and rear to go with the larger engine in it and the ISF has even bigger front calipers and different wheel bearings to accommodate a different offset so that wider wheels can fit inside the wheel wells. However most online parts stores (not Amazon) had no trouble telling me this and never asked for the VIN number.

      BTW you always want the big ones, replace the calipers too, if you have to.

      Only if you're prepared to replace the master cylinder and brake booster as well.

    11. Re:Call me crazy by luis_a_espinal · · Score: 1

      Nothing beats AutoZone and O'Reilly Auto Parts. Did the whole car-part purchasing from Amazon, ended in fail. Did you know that regardless of make/model, brake rotor size depends on if the car was manufactured in Japan or not? Yup, only the VIN will tell you that (or you measure the part directly), and Amazon doesn't have a way of filtering based on that either. At least locally, you can return the part that day and swap in time to finish the job.

      This. There are specialty things that are best purchased directly from more "domain-specific" sites (from AutoZone to Buy Buy Baby or Etsy) as well as directly from Target or even Walmart. Books I usually buy them from Amazon out of convenience, but I do try to buy and pick up from Barnes & Noble.

      I also buy a lot of seeds and plants for gardening off ebay or the local nurseries (even though the same things are typically available on Amazon.)

      It is really hard to beat the convenience though.

    12. Re:Call me crazy by Anonymous Coward · · Score: 0

      If you pay for Amazon Prime, at $99 a year, you need to spend $500 with Amazon before your 5% back on purchases card gets you to the break-even point. Amazon literally banks on people focusing on the perception of the value of convenience vs. what it is actually costing them.

    13. Re:Call me crazy by HornWumpus · · Score: 1

      Funny, they always ask me for engine size as part of the process. Must be a broken DB entry for Lexus IS series.

      Getting the fat tires would be the main point... Master cylinder etc depends on the specifics of the Calipers. Bigger rotors don't necessarily require bigger caliper cylinders. You would certainly need new caliper brackets.

      I once put Acura legend brakes on a Civic. Much cheaper than aftermarket.

      --
      John McAfee 'It was like that time I hired that Bangkok prostitute; to do my taxes, while I fucked my accountant'
    14. Re:Call me crazy by Presence+Eternal · · Score: 1

      You might want to check your math before you throw any stones there buddy.

      A better criticism would be to say that I can get 3% back on a store card without needing prime at all, so I'd actually have to spend $4950 a year to break even vs the non prime card. I almost spend that much with them, but not quite. What kicks in is the aforementioned no rush shipping bonus, which I more than make up the difference from. Plus there's the formal prime benefits, like the two day shipping for the occasions where I actually need something fast.

  6. So let me get this straight... by cheesybagel · · Score: 2

    A 40-year bond from a private company which might not last even half that long with a yield that is 1.45% larger than historically low rate government bonds. Riiiight....

    1. Re:So let me get this straight... by Anonymous Coward · · Score: 0

      Indeed. It's all in how you package up that debt... Perhaps gov pension funds would buy into this... they'll benefit short term (fund manager might get a bonus!), and long term they'll be bailed out...

    2. Re:So let me get this straight... by ClickOnThis · · Score: 2

      A 40-year bond from a private company which might not last even half that long with a yield that is 1.45% larger than historically low rate government bonds. Riiiight....

      The duration of a bond may not reflect its actual lifetime. If the bond is callable, then the issuer has the right to buy it back under conditions specified in the bond issue.

      Many people have 30-year mortgages on their house, but refinance into other mortgages well before 30 years go by.

      --
      If it weren't for deadlines, nothing would be late.
    3. Re:So let me get this straight... by cheesybagel · · Score: 1

      The question is why would Amazon do something like that considering the rates would be really low? It would be in their best interest to delay payments for as long as possible.

    4. Re:So let me get this straight... by ClickOnThis · · Score: 2

      I'm not sure I understand your question. Amazon wants to borrow at a low rate. And if rates are going up, then locking them in is a good thing. If rates go even lower, then they can call the bonds back and re-issue new ones at lower rates. Granted, the bonds may rise in value if rates drop, but if the math works out for them, they can do it.

      --
      If it weren't for deadlines, nothing would be late.
    5. Re:So let me get this straight... by cheesybagel · · Score: 1

      No, what I said was that rates are expected to go up further in the future. So why would Amazon be interested in paying off their debt early?

    6. Re:So let me get this straight... by ClickOnThis · · Score: 1

      Okay, I think we understand each other now.

      Obviously Amazon would hold onto its bonds if the yield Amazon has to pay out is low compared to the market (i.e., if rates rise.) But if rates drop, then Amazon may want to exercise the option (if they have it) to call the bonds back, and re-issue new ones that have a lower yield, i.e., a lower payout cost for Amazon. Just like someone refinancing a mortgage.

      I don't know the details of the offering, but I doubt that all of the bonds Amazon wants to offer have 40-year terms. Whatever side you're on in a bond transaction, a mixture of terms can make sense.

      --
      If it weren't for deadlines, nothing would be late.
    7. Re:So let me get this straight... by Anonymous Coward · · Score: 0

      What idiot buys an unsecured, callable bond at 1.45% over par?

    8. Re:So let me get this straight... by Anonymous Coward · · Score: 0

      The same kind of idiot who doesn't know what the definition of par value for a bond is?

  7. And won't deliver it on time or at all... by Anonymous Coward · · Score: 0

    Thousands of complaints about AMZL-US shipping and people pissed off to the point of canceling prime membership.
    https://www.amazon.com/forum/a...

  8. I can't grok the desc by Presence+Eternal · · Score: 1

    I don't know much about what it means by 'points above treasuries', is there a reason they say it like that? I mean, my savings account is like 1.15% interest. Hell, my video card is like 60% apy. :)

    1. Re:I can't grok the desc by Anonymous Coward · · Score: 0

      Yes, this is done for very specific reasons related to corporate finance.

      Firstly, the rate of return on Treasury Bills (a.k.a. T-Bills, Government Debt) is regarded as what is known as the "risk free rate" because in theory the US Government will never default on them, hence they are free from the risk that you won't get your money back. The Capital Asset Pricing Model (a.k.a. CAPM) which is used as the basis of valuation for securities uses this as an input.

      Secondly, the risk free rate is not constant and changes with the issuance of government debt so it is quite common for the rate of interest paid on bond issues to be denominated in this way, with the additional interest paid on the bond (i.e. the risky bit of it) set out in this way. It simplifies the valuation of the bonds because it removes the need to forecast what the risk free rate will be across the life of the bond.

      Evil and allegedly therefore clueless MBA (if you believe anything on Slashdot) with a science/tech background.

    2. Re:I can't grok the desc by Presence+Eternal · · Score: 1

      Thank you for your explanation.

  9. Doesn't Google have more cash on hand than god? by zkiwi34 · · Score: 1

    Why doesn't it use this? Did their lawyers and accountants screw up big time?

    Unsecured bonds from a company as rich as Google, sounds like they are expecting epic fail and don't want to get caught.

    1. Re:Doesn't Google have more cash on hand than god? by Anonymous Coward · · Score: 0

      Google can't move a penny inside the USA, to evade taxation. It is all in an Irish bank, awaiting the next big "adjustment" to the Euro. Then Google will have $0 net worth but the homeless guy on the corner will at least have a few bucks in cold hard cash.

    2. Re:Doesn't Google have more cash on hand than god? by ClickOnThis · · Score: 1

      TFA is about Amazon, not Google.

      Anyway, Amazon has about 21.5 billion USD in the bank -- or rather, banks, as not all of it is held domestically. So, this deal would consume most of its cash on hand if they didn't look for financing. It is not a good thing for a company to be low on cash in the bank, because their cash flow can be wrecked if they can't buffer unexpected expenses.

      --
      If it weren't for deadlines, nothing would be late.
  10. Re: Doesn't Google have more cash on hand than god by zkiwi34 · · Score: 1

    Oops. I meant Amazon.

  11. Food ain't gonna be easy even for Amazon. by Anonymous Coward · · Score: 0

    Whole "paycheck" Foods recently opened a store in Victoria BC. We have a few wealthy people here but much like the recent expansion of Cabela's to Nanaimo and Bass Pro Shops to Delta BC there are more floor walkers and security people there pretending to shop than customers.

    Food distribution is the most time sensitive business from a warehousing perspective. Much of the product cannot be long term stocked in the same way you can with most of what Amazon sells. Delivery of refrigerated product does not work with current infrastructure and precludes using their existing delivery methods. Unless Amazon has something revolutionary in the works with automated refrigerated delivery systems that they are being totally mum about we are about to see a spectacular failure the way we did with Target Stores in Canada.

    Also Amazon relies heavily upon the postal service in rural setting so the only markets that food delivery can work are in urban centers. A huge chunk of Amazon's current business is in rural delivery of good like Sears once had a lock on with their micro mail order stores and their once revolutionary catalog business. In fact the demise of Sears rural catalog business is due to a very large extent, to the rise of cheaper effective online sales companies like Amazon. So we can also write off a huge portion of Amazon's existing rural customer base from ever using online food sales. Sorry Amazon but I have the feeling that you are setting yourself up for a spectacular fail as the delivery cost of products with short shelf life will make the business very unprofitable.

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