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Amazon.com, Inc. Just Took Advantage Of Federal Reserve Lag

Amazon.com Inc (AMZN)

Amazon.com, Inc. will go into massive debt in order to buy Whole Foods Markets Inc, according to a press release published by the firm on Tuesday morning.

According to the release the firm “expects to use the net proceeds from the offering to fund all or a portion of the consideration for its acquisition of Whole Foods Market, Inc. and for general corporate purposes.”

The total cost of Whole Foods is around $13.7 billion, or $42 per share. That means this could be a truly massive debt deal. It, according to market watchers, could end up at around $16 billion.

Amazon goes into debt

Before selling the new bonds, Amazon.com, Inc. was in about $9 billion in debt. That’s nothing compared to the firm’s massive cash flow and its market capitalization. That means that this deal will almost triple the firm’s total debt. Despite that, those who rate bonds seem to be pretty happy with the deal.

Amazon.com Inc (AMZN)

Moody’s Vice President Charlie O’Shea said that “reflects our view that despite the increase in debt, the Whole Foods acquisition is an immediate credit positive for the company on a variety of fronts”.

The ratings agency has a Baa1 rating on the firm’s bonds. After the deal was announced Moody’s also changed it credit outlook on the firm from Stable to Positive. That’s because the firm believes that the Whole Food’s acquisition will kick start the Amazon grocery business.

There’s no way to tell, just yet, what the yield on the firm’s debt will be. Once it starts offering the instruments to investors we’re likely to get some indication of the total value of the deal, and the coupon that the firm will pay on them.

Taking advantage of low rates

Amazon.com, Inc.   has been an exceptional cash generator over the years, so it’s a big surprise that it has decided to take on debt in order to buy Whole Foods Markets. Many acquisitions of this size involve a stock-for-stock swap where those with stock in the buyout target get paid in shares of the firm buying in.

Instead of doing that for this deal, however, Jeff Bezos and his finance team are going to buy Whole Foods stock for cash it raises from the debt markets. That’s likely a result of interest rates being so low right now.

The interplay between the short term rates of the Federal Reserve and the price that firms actually pay is something of a controversy among economists. It’s clear, however, that big business is loving the low interest rate environment the Fed has apparently cultivated.

Amazon.com, Inc. is just the latest in a long line of debt hungry mega corps selling bonds in the last five or six years.

Even companies, like Apple Inc. that are sitting on massive piles of cash have gone into dramatic debt in recent years in order to take advantage of those rates.

Most recently junk rated Tesla Inc was able to raise $1.8 billion at a rate of just 5.3 percent.

 

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