Amazon Purchases Whole Foods: The Activist Trade

Extra! Extra! Read all about it! Amazon buys Whole Foods! Amazon (AMZN) is buying Whole Foods (WFM) at $42 a share. The markets and the media will continue to discuss the implications of Amazon and its expansion into the grocery market in the weeks to come. From an investment manager and allocator’s perspective, we want to know how this trade impacts the larger hedge fund universe. Two managers advocated for this sale, Neuberger Berman and JANA Partners. This activist push may have helped this deal through and we want to investigate how the trade transpired.

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Background

On April 10th, JANA filed a 13D, disclosing 26,314,367 shares (including options to purchase 3,535,000 shares) of ownership, causing a spike in the price. On that day, we knew the amount of shares they purchased, but when their 13F was released in May we discovered that as of March 31st JANA deployed $424MM into the stock and $83.5MM in call options, approximately 14MM shares and 2.8MM options. From 3/31 to 4/10, only 5 trading days, they had purchased an additional 12M shares or 2.4M on average each day. The 90-day average daily volume (ADV) was 4.7MM shares on March 31st, meaning they traded 50% of the 90-day ADV for five days straight.

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AMZN/WFM

After JANA’s announcement WFM’s stock price jumped to $36 and so did the % of Shares Outstanding (S.O.) that hedge funds own in the most recent 13F filings. JANA’s position alone was ~12% of S.O. The stock price leading up the April 10th announcement did not move dramatically and hedge fund ownership in terms of % of S.O. was static over the past two quarters, approximately $29 and 9% of S.O. After Friday’s announcement, the price jumped to $42. Since March the stock has risen $12 or 40%. We will analyze this further with Q2 filings, which will reveal which other funds piled into the trade after JANA’s announcement.

Whole Foods: Stock price vs. % of Shares Outstanding of Hedge Funds leading up to AMZN’s purchase:

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Stock price vs quantity of shares owned by hedge funds:

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JANA

Prior to Amazon’s purchase, JANA’s WFM position jumped to a 16% position in their portfolio, based on their public filings. Since Amazon’s announcement on Friday and the corresponding spike in WFM’s price, WFM has become a 20% position in their public filings portfolio and has generated ~360bps. For context, this is the 3rd largest position they have held over all their public filings, back to 2002, and is the second largest position over the past five years based on average position size of the trade. It’s second only to Agrium (AGU), a Canadian retail agriculture company that fended off JANA’s proxy fight to obtain board seats in 2013.

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From 2002 through May 2017, JANA has had a 68% batting average and a 1.18x Win/Loss ratio in names larger than 10%, but since Jun 2012 they have had a 50% batting average and a 1.10x W/L ratio.  So far WFM has spiked in price due to the 13D and from Amazon’s purchase, and will improve both JANA’s batting average and win/loss ratio in the short term. How this trade plays out and how JANA manages the position will determine how much it positively affects those statistics for names >10%, their highest conviction trades.

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Ownership and Overlap

Overall, since the most recent 13F filings, JANA was the largest purchaser. Some others are Renaissance at $42MM, Falcon Edge at $20MM, Freshford Capital at $9MM, and Two Sigma at $9MM. Millennium ($47MM), Canyon ($41MM), and Alyeska ($34MM) were the largest reductions. The name did not have heavy ownership across managers and half of those largest movers are more quantitative shops. Using the Novus Overlap functionality, we see that none of the managers in our Event-Driven universe owned this position as of the most recent 13F filing, but some may have initiated positions after JANA’s disclosure on April 10th. The hedge fund universe did not see upside potential in WFM at the start of this year, but the Q2 filings will show what managers jumped in after the announcement.

We will continue to follow this trade and update it with Q2 13F filings to see what other funds entered this name after April 10th.