Webvan Group (Nasdaq: WBVN) said Monday it will acquire HomeGrocer.com (Nasdaq: HOMG) in a stock swap valued at $1.2 billion.
The deal offers a slight premium for HomeGrocer. Based on Webvan's closing price Friday, the deal values HomeGrocer at $9.38 a share. HomeGrocer closed at $8 a share Friday. Both companies have been public less than a year and have rocky stock charts.
The merger helps consolidate the highly competitive online grocery business. Peapod (Nasdaq: PPOD) and Streamline.com (Nadsaq: SLNE) have both had funding problems. Other current and potential competitors include NetGrocer, Priceline.com's (Nasdaq: PCLN) grocery service, Safeway (NYSE: SWY) and Amazon.com (Nasdaq: AMZN).
Under the terms of the deal, HomeGrocer shareholders get 1.07605 shares of Webvan common stock. Approximately 138 million shares of Webvan stock will be exchanged.
The merger will also accelerate Webvan's expansion plans. On a conference call, Webvan CEO George T. Shaheen said the merger made sense because the combined companies, which will operate under the Webvan name, could "expand faster with less capital outlay."
The combined companies are expected to have revenue of $300 million to $325 million in 2000, and revenue of $1.1 billion to $1.2 billion in 2001, said Robert Swan, Webvan Chief Financial Officer.
The combination is expected to extend Webvan's market reach to a total of 13 U.S. metropolitan areas by the end of 2000. Webvan and HomeGrocer currently operate in nine major metropolitan areas. By the end of the year, Webvan expects to serve metropolitan area markets in Atlanta, Baltimore, Bergen County (N.J.), Chicago, Dallas, Los Angeles, Orange County (CA), Portland (OR), Sacramento, San Diego, San Francisco, Seattle, and Washington, D.C.
Webvan had projected to be servicing 15 cities by the end of 2001. The companies would have competed in nine markets in 2001. Shaheen said the combined companies will also be able to move into new categories more easily and with less capital.
"We will be focusing on the bricks and mortar competition," said Shaheen. "This combination accelerates our market presence, target competitive focus and intends to improve our operational and financial strength."
Webvan has outlined plans to expand into other areas outside of its core grocery business. The company plans to use its "last mile" e-commerce model to deliver books, personal electronics, and home entertainment.
Webvan will still need additional financing to round out its expansion plans, but it will need half what it previously projected. Shaheen said it will need about $275 million in additional financing, but added that the company could cut back its expansion plans and be self-funding. The company currently has about $650 million in cash.
Shaheen said the merger will save a lot of capital and boost efficiency among the supply chain.
The companies expect the transaction to close late in the third quarter or early fourth quarter of 2000. The merger will be accounted for as a purchase transaction.
It will take six to nine months from the closing date to integrate the technology, people and practices of the two companies. Webvan didn't outline layoffs, but did say the company would evaluate cost savings.
The company intends to save $20 million to $30 million by integrating marketing and administrative functions.
Webvan anticipates that margins will improve by 50 percent with HomeGrocer in the fold. The two companies will have enhanced buying power.
In addition, revenue growth will accelerate by 50 percent over 2001 projections. The company will be able to save more than $200 million in operating costs in 2000 and 2001.
Upon completion of the acquisition, Webvan's founder Louis Borders will remain as chairman of the board of Webvan and Shaheen will continue as president and CEO of the combined company. In addition, two new members will join Webvan's board of directors. HomeGrocer CEO Mary Alice Taylor said she will help with the transition, but Shaheen is running the company.