Blair Levin of Stifel Nicolaus issued a note yesterday regarding the FTC’s stance on Whole Foods (WFMI) acquisition of Wild Oats (OATS). In his note, he points out that the comparisons some are drawing are probably not very realistic.
Some have interpreted yesterday’s FTC move to block Whole Food’s acquisition of Wild Oats as a negative for the XM (XMSR)-Sirius (NASDAQ:SIRI) merger prospects. At a surface level, the two cases are analogous in that both require antitrust authorities to decide whether the relevant market is a narrow one, or whether the merging parties are part of a larger, more broadly defined market. But we believe the similarity largely ends there, and that the FTC’s decision in the food-store case sheds little, if any, light on XM-Sirius, which is being reviewed by the DOJ (and FCC), or even Google (NASDAQ:GOOG)-DoubleClick, which is being reviewed by the FTC.
First, and most obviously, the Federal Trade Commission and the Department of Justice, although guided by the same legal and economic principles, are distinct agencies with their own staff, final decision makers, and institutional dispositions; so drawing conclusions about what the DOJ will do on XM-Sirius based on what the FTC does on Whole-Foods/Wild-Oats is suspect from the get-go.
Second, and more importantly, in our view, the facts of the two cases are different and, as the old saw cautions, antitrust cases are very fact specific. The FTC has not yet made public its complaint but press reports suggest there may be evidence that Whole Foods viewed the deal as a way to eliminate a rival. We can’t rule out the possibility that “smoking gun” evidence could be uncovered in the XM-Sirius investigation, but, if in fact the FTC uncovered that kind of evidence in Whole Foods, it would likely be damning. And apart from smoking gun evidence, the two cases could differ on the key analytics of antitrust investigations: whether they are likely to substantially harm competition or, conversely, whether they present credible efficiencies or possibilities for innovation.
Third, the FTC emphasized the different environment or “experience” of shopping for groceries at Whole Foods and at Wal-Mart (NYSE:WMT), even if both may sell premium natural and organic products. While authorities may or may not ultimately conclude that satellite radio is a different experience from terrestrial radio, iPods and other alternatives, they would do so based on market-specific facts that are quite different than in the context of organic food shopping.
Fourth, and we think most importantly, we understand that the Whole-Foods/Wild-Oats merger presents a natural experiment of sorts in that there are certain local markets where both stores compete directly and other areas where only one operates; thus, the antitrust authorities can examine the pricing effect relatively directly. No such structure exists for the merger of the satellite radio companies, which compete nationally. Similarly, we think the DOJ’s interpretation of market information — such as why there has only been one price increase in five years or how to interpret XM/Sirius (auto trial) conversion and churn rates — will prove very important in the satellite-radio deal, but those data points will stand or fall on their own and have nothing to do with the organic food market.
Thus, although we continue to believe that XM and Sirius have the burden of persuading DOJ and the Federal Communications Commission, we do not believe the FTC’s decision to block the Whole-Foods/Wild-Oats merger has much to say about the XM-Sirius prospects.
As for Google-DoubleClick, while it’s being reviewed by the FTC and opponents it will probably seek to use the Whole Foods decision to their advantage; we believe the Internet advertising market’s dynamics and facts are such that the organic-food analysis will not provide a significant precedent, though we acknowledge that the decision should give the companies some pause regarding the FTC’s willingness to engage in antitrust enforcement.
Disclosure: Author has a long position in Sirius and XM, no position in any other company mentioned above.