Whole Foods to court to defend Wild Oats takeover

WASHINGTON (Reuters) - Whole Foods Market Inc. (WFMI.O) and rival Wild Oats Markets Inc. OATS.O head to court on Tuesday, hoping to convince a federal judge to allow their proposed merger to proceed over the objections of U.S. antitrust authorities.

Lawyers for the two companies will square off against the Federal Trade Commission, which is asking U.S. District Judge Paul Friedman to block the deal on the grounds it would hurt competition in the organic grocery market.

Antitrust experts say much may depend on the words of Whole Foods' own chief executive, who told his board in e-mails that the deal was designed to avert price wars with Wild Oats and head off competition with mainstream supermarkets.

"I think that the FTC will really put weight on the (e-mails) when the CEO is speaking in his own name in the capacity of CEO," said Chris MacAvoy, an antitrust lawyer with the firm Howrey LLP, who is not involved in the case.

"The (e-mails) are a huge problem," said another Washington antitrust lawyer who declined to be named.

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

To get the judge to issue a preliminary injunction against the deal, the FTC must convince the judge it is likely to succeed in proving at trial that the combination of the two companies would be anticompetitive.

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

MacAvoy said he believes Whole Foods has a strong case to make in defense of the merger -- specifically the company's argument that it faces strong competition in a broader market that includes mainstream supermarkets.

"I have trouble personally accepting the notion that you can take a particular (store) format or a particular strategy of going to market and say that's a relevant market," MacAvoy said.

A central question for Friedman will be whether the acquisition of Wild Oats would give Whole Foods the power to raise prices, a key test under antitrust law.

Both sides will present testimony from expert economists to try to bolster their views on pricing power and how the judge should view the grocery market.

But in the end, MacAvoy said it could be Mackey's own words that presents the biggest challenge for the companies.

In an e-mail to Whole Foods' board, Mackey said: "(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.

"Eliminating them means eliminating this threat forever, or almost forever," Mackey said.

In a court brief, the companies downplayed Mackey's writings, saying he is "an extremely competitive individual" who does not care for his competitors.

"But courts have long recognized that such statements of intent have little, if any, probative value when contrasted, as here, with actual market facts of vigorous competition from every direction," the companies said.

The case also has brought attention to Whole Foods because of comments that Mackey posted on a Yahoo! financial forum under the alias of "rahodeb."

In Yahoo! postings between 1999 and 2006, Mackey talked up his own company while predicting a bleak future for Wild Oats.

Mackey has accused the FTC of using "bullying tactics" and distorting his private statements in order to block the deal.

As embarrassing as they may be, MacAvoy said the Yahoo! postings will not carry as much weight as the official e-mails Mackey sent to the Whole Foods board.

"I don't think that the FTC will put much weight on these anonymous chat room postings," MacAvoy said. Instead, the FTC may try to use them as corroborating evidence.