Whole Foods shares keep rising in bidding war speculation

(Reuters) - Whole Foods Market Inc (O:WFM) shares rose on Monday for the second straight trading session after Amazon.com Inc (O:AMZN) announced plans to buy the upscale grocer, with investors betting that rivals could step in to create a bidding war.

Despite that possibility, Amazon shares also gained as Wall Street analysts lauded the proposed $42-per-share deal and bet that the company would prevail in any bidding battle.

Whole Foods shares rose as much as 2.2 percent on Monday - suggesting hopes the company might fetch a higher price - and were still up 1.3 percent at $43.25 in afternoon trading. Amazon shares rose as much 3 percent and were still up 0.6 percent at $993.17.

“Every grocery store out there now is having a conversation about how much they can afford to spend to keep Amazon out of the space,” said Brian Culpepper, a portfolio manager at James Advantage funds.

Culpepper, who owns Kroger Co (N:KR) shares, said Kroger is the company would be most likely improve Whole Foods’ efficiency, but that it would have difficulty matching Amazon’s cash offer.

Kroger shares were up 1.3 percent at $22.59 on Monday afternoon.

“Kroger would have to pay in stock, and their stock has been hurting,” giving them less leverage to get into a protracted bidding war with Amazon, Culpepper said.

Barclays (LON:BARC) analyst Karen Short raised her Whole Foods price target to $48 from $38 and upgraded the stock to overweight from equal-weight, citing the possibility of counterbids.

"Many will do anything to either make this acquisition more costly for Amazon, or prevent the asset from landing in Amazon's lap," Short wrote in a note to clients.

A $48-a-share price tag would be more than reasonable for a fellow retailer that could eliminate overhead at Whole Foods, Short said, while adding that very few companies could outbid Amazon.

Amazon's offer of $13.7 billion, representing a multiple of 10 times earnings before interest, tax, depreciation and amortization, could possibly be raised to 11 or 12 times, according to Kevin Dreyer, co-chief investment officer at Gabelli Funds, which holds Whole Foods shares.

"Fourteen billion is a big number but it’s not a number where there’s no other buyer," said Dreyer. "Others could certainly look at this and sharpen their pencils."

Wal-Mart Stores Inc (N:WMT) could have sufficiently deep pockets to make a counter bid and other grocery rivals such as Kroger or Albertsons Cos Inc (N:ABS) would have the motivation, he said.