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Amazon Is Seeking $16 Billion Bond Sale For Whole Foods (bloomberg.com)
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.
AKA "free money from suckers"
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
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....
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.
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. :)
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.
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.
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.
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.
Do you think you can get a forty-year loan from a bank?
Oops. I meant Amazon.