Webvan bags HomeGrocer for $1.2 billion

In one of the first signs of consolidation in the highly competitive online food-delivery market, Webvan buys one of its rivals for $1.2 billion in stock.

Greg Sandoval Former Staff writer
Greg Sandoval covers media and digital entertainment for CNET News. Based in New York, Sandoval is a former reporter for The Washington Post and the Los Angeles Times. E-mail Greg, or follow him on Twitter at @sandoCNET.
Greg Sandoval
4 min read
In one of the first signs of consolidation in the highly competitive online food-delivery market, Net grocer Webvan has bought rival company HomeGrocer.com in an all-stock deal valued at $1.2 billion.

Under the terms of the agreement, HomeGrocer stockholders will receive 1.076 shares of Webvan common stock in exchange for each HomeGrocer share held. About 138 million shares of Webvan stock will be exchanged for all currently outstanding shares of HomeGrocer.

Web grocers have been hit particularly hard on Wall Street since investors began to flee e-commerce stocks late last year. As the cost of doing business in the market rose while share prices for many key players tumbled, analysts warned that many companies could become takeover targets or be forced to shut their doors.

"Certainly this would consolidate the two strongest players in the online-grocery space," Gomez analyst Alan Alper said. "I think both companies were looking at the cost associated with building out across the country and figured that they might not have the money to go on."

The new company, which will operate under the title "Webvan Group," will be headed by Webvan's executive team. Webvan chief executive George Shaheen will remain head of the Webvan Group, and Webvan chairman Louis Borders will act in the same capacity for the new company. A HomeGrocer representative said they had not been told what role HomeGrocer chief executive Mary Alice Taylor might have.

A Webvan spokesman said Taylor has said she will remain in place through the proposed merger, expected to take place by the third or fourth quarter. After that, the spokesman said, there is no position in the new company, as of yet, identified as Taylor's.

Jim Barksdale, one of HomeGrocer's major investors and a member of its board of directors, will join the Webvan Group's board.

Gartner analysts Geri Spieler and Kevin Murphy say the the key for online grocers is to keep prices close to those of brick-based grocery stores while offering greater convenience and delivering efficiently.

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The deal gives the larger, combined company a significant leg up over competitors, such as ailing Peapod and a host of regional firms, including Streamline and Pink Dot--which is changing its name to PD Quick. The deal will also help Webvan Group compete with the Net plays of brick-and-mortar companies like Albertson's and Safeway.

The new company will serve nine major metropolitan areas, including San Francisco, Los Angeles, Chicago and Atlanta, with plans to expand to 13 cities by the end of the year.

Shaheen said today that he first approached HomeGrocer CEO Mary Alice Taylor about the combination, and the deal was sealed in six weeks.

"The timing was right, so I picked up the phone and called her and she agreed," Shaheen said. "The beauty of the deal is that our companies don't overlap. We're not operating in the same cities, so our transition is going to be smoother than if we had to decided to scale back in certain areas."

HomeGrocer was Barksdales' first investment after selling Netscape to AOL and forming the Barksdale Group in March 1999. The Barksdale Group, a venture capital company he formed with two other former Netscape executives, invested $5 million, holding a 4.5 percent stake in the Web grocer following its IPO. Venture capital firm Kleiner Perkins took an 11.1 percent stake in HomeGrocer and Winblad Venture Partners owned 11 percent.

Now, three months after the IPO that raised $245 million, Special report: End of the Beginningthese three firms have decided to allow one of their top investments to be sold. HomeGrocer lost $84 million on $21.6 million in revenue last year and $7.9 million on $1.1 million in revenue in 1998.

Since Webvan's November public offering, the company's shares have traded as high as $34 but have dipped below the original IPO price of $15. As of the close of the market Friday, shares were trading under $9.

HomeGrocer hit the Street three months ago but has since fallen far below its IPO price of $12, now trading in the $6 range. Amazon.com owns about 22 percent of the Kirkland, Wash.-based Web grocer.

"Given the capital crunch that every (e-commerce) segment is experiencing, the smartest thing for them to do was to band together and live to fight another day, and not against each other," Alper said.

Retail grocery sales reached $449 billion in 1999--or about 18 times the total sales of books, both retail and online--according to the Food Marketing Institute.

Foster City, Calif.-based Webvan has been steadily expanding its online product offerings. In a move to take on giants like Amazon, Webvan has added books, videos and other entertainment items to its virtual shelves in recent months.

Shawn Milne
E*Offering Analyst
Discussing the expected benefits for existing HomeGrocer customers.

With Amazon as an investor, Shaheen has been asked how the two companies might team up. Amazon invested $60 million in same-day delivery company Kozmo.com this year and is said to be interested in offering new ways to ship goods to customers.

Shaheen said that no discussions between Amazon and Webvan have taken place yet. But he added that he is looking forward to discussing the possibilities.

The Webvan Group is "not an Internet grocery play," Shaheen said. "This is a last-mile play. Webvan has always been about delivery. That's where it has strength. We view ourselves as an Internet retail company, delivering the last mile."