Judge questions Whole Foods' argument

Judge questions Whole Foods' argument

	Published : Tue, 31 Jul 2007 22:54 By : Agencies Print this Story

WASHINGTON (AP) - A federal judge on Tuesday questioned a central part of Whole Foods Market Inc.'s argument that it should be permitted to buy its rival Wild Oats Markets Inc.

The Federal Trade Commission has filed suit in federal court to block the $565 million deal, claiming that the two companies compete in a specific market of natural and organic food and their combination will lead to reduced service and increased prices.

David T. Scheffman, an expert witness called by the two companies, disputed that contention and said the two chains compete with other grocers, such as Safeway Inc. and Trader Joe's.

'They are supermarkets,' said Scheffman, an economic consultant previously employed by the FTC. 'They are one-stop shopping.'

However, Judge Paul L. Friedman said Safeway's stores might not provide one-stop shopping if a customer is interested in organic food.

'There are certain things you can only get at Whole Foods or Wild Oats,' the judge said. That view jibes with the government's case that the two companies constitute a unique market.

Scheffman countered that plenty of Whole Foods customers buy organic food at Safeway and other stores, which are increasingly offering such alternatives.

At the outset of the hearing, the judge admonished reporters not to read into his comments too deeply.

Shares of Whole Foods jumped $3.66, or 10 percent, to $40.72 in after-hours trading, following the release of second-quarter results that beat analysts' expectations.

Austin-based Whole Foods' quarterly profit slipped despite higher sales because it doubled spending on new stores, but the per-share earnings of 35 cents -- equivalent to $49.1 million -- topped the consensus forecast on Wall Street by 2 cents.

Earlier Tuesday, a lawyer for Whole Foods sought to discredit a government analysis that concluded its proposed acquisition of rival Wild Oats would be bad for consumers.

Paul H. Friedman, Whole Foods' attorney, argued that the FTC's expert witness did not consider relevant economic data, such as changes in prices at Whole Foods stores after Wild Oats exited several markets where the two companies competed.

Such pricing data could show whether Wild Oats acts as a constraint on Whole Foods' ability to raise prices. Whether a transaction will give a combined company greater pricing power is a key question in antitrust law. Whole Foods is arguing that the FTC's antitrust case is weaker without such data.

The government's witness, Kevin Murphy, a professor at the University of Chicago, said that the available pricing data is inadequate. For example, in December 2006 Wild Oats closed a store in Ft. Collins, Colo., that competed with a Whole Foods, Murphy said, but there hasn't been sufficient time since then to determine how the move affected prices at Whole Foods.

Murphy also said that companies exit markets for many different reasons and data resulting from such a move are inconclusive.

Murphy said his study showed that the profit margins of Wild Oats stores declined when Whole Foods entered its markets, an indicator of increased competition.

But Whole Foods' attorney emphasized that Murphy did not present any data on the impact on Whole Foods' prices when Wild Oats entered or exited one of its markets.

Murphy added that Whole Foods did reduce its prices by 2 percent at its store in Boulder, Colo. in anticipation of Wild Oats opening a flagship store there.

But the judge struck that statement, because the data wasn't included in Murphy's written testimony.

Both lawyers questioned the expert witnesses on testimony they provided to the court in writing. Both testimonies remain under seal.

Judge Friedman is expected to rule on the case by mid-August, a spokeswoman for Whole Foods said.

Whole Food's effort to buy Wild Oats has attracted widespread attention due to the internal e-mails and online postings of the company's outspoken chief executive, John Mackey.

An e-mail sent by Mackey to Whole Foods' board of directors in February -- in which Mackey says the deal would enable the company to 'avoid nasty price wars' -- is a key part of the FTC's case.

Whole Foods said in February that it would pay approximately $565 million, or $18.50 per share, for its Boulder, Colo.-based rival -- a 17 percent premium at the time. That price is significantly above Wild Oats' closing price of $16.10 Tuesday, indicating that the market is skeptical of the deal's chances.

(This version CORRECTS value of the deal in the second paragraph.)