Webvan Agrees to Buy HomeGrocer.com for $1.2 Billion in Stock
Two of the nation’s largest online grocers announced Monday plans to combine in an attempt to accelerate their expansion plans and compete more effectively with bricks-and-mortar supermarket chains.
Foster City, Calif.-based Webvan Group Inc. agreed to buy rival HomeGrocer.com Inc., which entered the Los Angeles market in January, for about $1.2 billion in stock. The deal would allow Webvan, which operates in only three U.S. markets--Sacramento, San Francisco and Atlanta--to move into six more areas immediately and expand to 15 locations in the next year, at half the cost originally estimated, officials say.
After the deal closes in the fourth quarter, HomeGrocer would abandon its giant peach logo, and convert to the Webvan name. In converting to the Webvan system, HomeGrocer’s delivery windows would shorten to 30 minutes and its fees would probably come down, says Webvan Chief Financial Officer Robert H. Swan. As it enters new markets, it would also adopt Webvan’s model of delivering from larger, automated warehouses, rather than smaller facilities spread throughout markets.
Besides Los Angeles, Kirkland, Wash.-based HomeGrocer delivers in Dallas, Orange County, Portland, Seattle and San Diego. HomeGrocer Chairwoman and Chief Executive Mary Alice Taylor, who is stepping down after the deal is complete, says the merger was critical because it gives the combined company the advantage of more cash and less competition, helping it to build market share and compete against traditional supermarkets.
“What this merger means is we spend the marketing dollars to attract the customer from one source [supermarkets] instead of competing against each other,” she said.
The merger would turn up the pressure on other online grocers such as Peapod Inc., analysts say, and its increased share could force supermarket chains that have only been dabbling in online grocery retailing to accelerate their plans.
“Webvan and HomeGrocer combined are a far larger threat to Kroger and Safeway than they are separately,” says Ken Cassar, an analyst with Jupiter Communications.
However, Cassar and others don’t think most retailers are exactly shaking in their boots.
Online grocery sales now account for less than 1% of the $450-billion grocery business, and even if they rise to $17 billion by 2004 as e-commerce firms expect, they would still make up just 3% of all sales.
Wall Street wasn’t excited about the deal. Webvan’s share closed at $7.31 Monday, down $1.41 on news of the deal. Similarly, HomeGrocer’s shares dropped $1.22, closing the day at $6.88.
Under the terms of the deal, Webvan would pay 1.076 shares, or about $9.39, for each HomeGrocer.com share, 16% more than Friday’s price. Amazon.com Inc. is one of the largest stakeholders in HomeGrocer, holding 21.6%.
Both Internet companies are in need of capital, churning through tens of millions of dollars each month to build new warehouses and advertise to new customers. HomeGrocer.com had about 10 months of cash left at the end of last quarter while Webvan had 16 months’ worth, if they spent at the same rate as the previous three months.
By tapping into HomeGrocer’s $257 million in cash for expansion, Webvan, which is chaired by Borders Books founder Louis Borders, can further its expansion plans without taking on additional debt, officials said. Still, analysts say Webvan is paying too much just to wipe out a competitor and enter a few new markets.
Cassar said that “$1.2 billion is a dear price to pay for a company that has yet to turn a profit or generate significant revenues.”
The price tag is especially high, says Prudential Securities analyst Mark Rowen, given that the company would have to shell out additional money to convert HomeGrocer’s warehouses to the larger automated warehouse, which Webvan officials say is more efficient, requiring less workers to get orders out the door.
Webvan, which would deliver groceries, books and electronics, is years away from turning a profit, Webvan officials say, given its aggressive expansion plans and the high cost of doing businesses in each market.
Webvan had lost a total of $217 million by the end of its last quarter, while HomeGrocer’s losses totaled $137 million.
However, if anyone can make the online grocery business viable, Webvan can, analysts say, owing to its efficient distribution system and access to capital. And the combined company should be able turn inventory quicker, reducing spoilage and cut better deals with suppliers.
“There’s going to be room for just one virtual player,” said Neil Stern, a retail strategist at McMillan & Doolittle, a Chicago-based consulting firm. “It’s shaping up, in terms of money and technology, to be Webvan.”
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Bloomberg News was used in compiling this report.
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‘Dot-Com’ Casualties
Investors have hammered shares of both Webvan and HomeGrocer.com since their initial offerings. Webvan (ticker symbol: WBVN) went public at $15 a share in November; HomeGrocer.com (HOMG) went public at $12 a share in March. Weekly closes and latest on Nasdaq:
Monday closing prices:
Webvan: $7.31, down $1.41
HomeGrocer.com: $6.88, down $1.22
Source: Bloomberg News
