Whole Foods CEO saw merger eliminating threat

CHICAGO (Reuters) - The chief executive of Whole Foods Market Inc. (WFMI.O) saw acquiring rival Wild Oats Markets Inc. OATS.O as averting price wars in several markets and preventing mainstream supermarkets from competing in the organic grocery business, according to a federal court filing unsealed on Tuesday.

"(Wild Oats) is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space," Whole Foods CEO John Mackey said in an e-mail.

"Eliminating them means eliminating this threat forever, or almost forever," said part of the e-mail sent to Whole Foods' board prior to a discussion of the deal and quoted by the Federal Trade Commission in its lawsuit seeking to block the deal.

The FTC is challenging Whole Foods' planned $565 million takeover of Wild Oats on grounds the deal would hobble competition and increase prices to consumers.

Whole Foods, the largest U.S. natural and organic grocer, announced plans to buy Wild Oats in February. The companies have said the merger should be allowed to proceed in light of the fierce competition in the overall grocery business.

The FTC's complaint was filed June 6, but portions were kept under seal until Tuesday.

Later on Tuesday, Mackey accused the FTC of using "bullying tactics" to block the deal.

"Part of the reason to do almost any merger is to eliminate a competitor," he said in a lengthy blog posted on Whole Foods' Web site. "This is so self-evident to me that I really can't understand why the FTC wants to make a big deal out of it."

Antitrust lawyer Robert Doyle said Mackey's e-mail could be the centerpiece of the FTC's case to block the deal. "This is an awesome antitrust admission by the founder and CEO of the company," Doyle said.

A hearing on the government's request for a preliminary injunction to block the deal is scheduled for July 31 in U.S. District Court for the District of Columbia.

NASTY PRICE WARS

"By buying (Wild Oats) we will ... avoid nasty price wars in Portland (both Oregon and Maine), Boulder, Nashville, and several other cities which will harm (Whole Foods') gross margins and profitability," said another portion of Mackey's e-mail quoted by the FTC.

The FTC said Whole Foods had said in its 2006 annual report that a heavy emphasis on perishable foods differentiated it from conventional supermarkets.

Mackey had also emphasized the role of high-quality perishable food in Whole Foods' business, separating it from Wal-Mart Stores Inc. (WMT.N) and privately owned Trader Joe's.

"Wal-Mart doesn't sell high-quality perishables and neither does Trader Joe's," the FTC quoted Mackey as saying. "That is why Whole Foods coexists so well with (Trader Joe's) and it is also why Wal-Mart isn't going to hurt Whole Foods."

Whole Foods and Wild Oats lead the organic niche, but their total food sales pale in comparison to larger retailers.

The FTC's court complaint said Whole Foods intended to close "numerous" Wild Oats stores and to sell some others.

Shares of Whole Foods closed 1.4 percent lower at $38.95 in trading on Nasdaq on Tuesday. Wild Oats closed down 1 percent at $17.03, also on Nasdaq.

Morningstar analyst Mitchell Corwin said it would be hard to think of another potential buyer for Wild Oats if the Whole Foods deal fell through.

"I don't know if I'd want to even really speculate on that at this point. If the Whole Foods transaction doesn't go through it puts Wild Oats in a tough situation," Corwin said.

(Additional reporting by Jessica Wohl and Julie Vorman)