What Are the Prospects for an Amazon Merger With Target? Analysts Weigh In
Vermont’s first Target is slated to open at University Mall in South Burlington in October 2018.
When Gene Munster, managing partner of Minneapolis-based venture capital firm Loup Ventures, predicted that e-commerce giant Amazon (NASDAQ: AMZN) would buy department store chain Target (NYSE: TGT) this year, he knew such a declaration would make waves. In a New Year’s Day post on the Loup Ventures website titled “8 Tech Predictions for 2018,” Munster admitted it was his “boldest prediction.”
“Seeing the value of the combination is easy. Amazon believes the future of retail is a mix of mostly online and some offline,” wrote Munster. “Target is the ideal offline partner for Amazon for two reasons: shared demographics and a manageable-but-comprehensive store count.”
Business websites and magazines were quick to respond with skepticism, authoring headlines such as “Stop The Insanity Amazon Will Not Be Buying Target” (TheStreet), “Amazon Buying Target Isn’t as Likely as One Tech Analyst Seems to Think” (Adweek) and “No, Amazon Isn’t Buying Target in 2018” (Forbes).
Garrick Brown, vice president of retail research for the Americas with Cushman & Wakefield, says “the rumor’s been floating around for a while” that Amazon is looking to buy Target. He estimates the odds of the deal happening at between 25 percent and 33 percent.
Jeff Green, president and CEO of Phoenix-based retail real estate consulting firm Jeff Green Partners, predicts similar odds.
“I would say it’s about 30 percent,” says Green of the acquisition possibility. “It seems a little early for Amazon to try to digest Target while still digesting Whole Foods,” referencing Amazon’s recent acquisition of upscale grocery chain Whole Foods Market for $13.7 billion.
Although he agrees that an Amazon-Target deal is possible, Brown is quick to note that much of the speculation is based on the faulty premise that Amazon’s purchase of Whole Foods means it’s interested in brick-and-mortar retail.
What Amazon is really interested in, according to Brown, is affordable buildings in urban locations to increase its capacity to deliver fresh groceries to online buyers. Industrial real estate in urban areas is too expensive to buy and upgrade, but existing retail locations can serve the same function, he believes.
“Amazon didn’t buy a grocery chain; it bought 462 e-grocery distribution facilities,” says Brown, referring to the company’s acquisition of Whole Foods Market. “As long as Amazon can do deliveries [from Whole Foods locations], the company solved its biggest problem, which was e-grocery fulfillment center space.”
The Giants Get Bigger
Part of what’s fueling speculation of a Target acquisition is that Amazon, Walmart and Target have been on acquisition sprees in recent months. Walmart and Target have sought to expand into online retail (Target agreed to buy same-day e-commerce delivery service Shipt in December for $550 million), while Amazon has invested in brick-and-mortar stores.
“It certainly is a shrinking retail universe,” says Green. “This is especially true as Walmart begins to buy specialty [online] retailers such as Bonobos, ModCloth, Moosejaw and Jet.com.”
“In 2018 it may seem like a giant retail duopoly of Wal-Mart versus Amazon. The question is whether Target will become a third player in this,” adds Brown. “If Target is looking to become a third major omnichannel player, the easiest way to squash that competition is to simply buy them.”
Since Amazon already accounts for 45 percent of all e-commerce activity, according to Brown, the company could even be in danger of being broken up by government anti-trust rules.
“The idea that Amazon wants to corner the market is what’s fueling this speculation, and you can’t rule that out,” says Brown. “Is there a tipping point where Amazon has to worry about the government stepping in and breaking them up?”
M&A Activity Poised to Soar
Brown suggests that, regardless of whether Target sells or not, expect mergers and acquisitions activity in the retail space to be “through the roof” in 2018. Even though many retailers are performing well, the general concept of a struggling retail sector leads to depressed stock prices, which in turn leads to “an awful lot of undervalued retailers out there primed for acquisition.”
“We saw a bit of an uptick for some retail concepts over the holidays, but now we’re going into the traditional store closure season,” says Brown. “There are going to be some big and notable bankruptcies. The ‘retail apocalypse’ story is going to be back with a fury this year. When that happens, it hurts the whole retail sector.”
Target’s stock price peaked at $84.69 per share on July 17, 2015, and hit a five-year low of $50.76 on June 23, 2017. Shareholders enjoyed a rebound in the performance of the stock price leading into holiday shopping season, with the price closing at $67.17 per share on Wednesday, Jan. 3. The company’s market cap currently hovers around $36.5 billion.
Amazon, meanwhile, has seen a steady increase in its stock price over the company’s entire history, recording a record-high closing of $1,204.20 per share on Jan. 3 of this year. The company’s market cap is approximately $580.3 billion.
Other retailers that are prime targets for acquisition this year include Nordstrom and Macy’s, adds Brown.
“It remains to be seen if any of these theories make any sense, or if it is just analysts talking out of turn,” says Brown. “But it’s interesting cocktail party fodder, for sure.”
— Jeff Shaw