Amazon enlists bond market as it seeks world dominance

Jeff Bezos has an army full of bond investors ready to back Amazon’s conquest of the global supermarket industry.

The world’s largest online retailer this week sold $US16 billion ($20.4 billion) of unsecured bonds in seven parts to fund its $US13.7 billion acquisition of grocery retail chain Whole Foods.

Amazon-Whole Foods deal a ‘game changer’

Amazon’s move into the grocery space will threaten and disrupt consumer packaged-goods companies globally.

And in a sign of market interest, the longest portion of the offering, a 40-year security, was sold at a yield of 1.45 percentage points above US Treasuries, down from initial talk of 1.6 percentage points to 1.65 percentage points, according to a person with knowledge of the matter.

Amazon is expected to reduce prices at the iconic yet struggling high-end supermarket chain, which is trying to lure more low- and middle-income shoppers. The deal, which rattled the grocery world when announced in June, could intensify a price war in an industry beset by razor-thin margins and persistent deflation.

The debt sale marks Amazon’s first bond-market foray since 2014. The company has more than $US21 billion stashed away in cash and other short-term investments that could have been deployed as a bigger allocation in the acquisition financing. But Amazon needs to preserve cash, and now is an opportune time for issuers to take advantage of low interest rates, said Bloomberg Intelligence analyst Jitendra Waral.

“This route is cheaper and gives them flexibility,” Waral said. “The expansion plan Amazon has gotten on with buying Whole Foods is just the beginning, not the end.”

The bonds may be attractive to investors who want exposure to Amazon, but are reluctant to buy the stock, which has more than quadrupled in value over the past five years, while the S&P 500 hasn’t even doubled.

The share price can be volatile with investors balancing their excitement over Amazon’s sales growth and dominance in e-commerce with the company’s slim profits and Bezos’s big spending ways. Amazon’s shares have fallen about 7 per cent from their July 26 record close.

Mega deals

The e-commerce giant’s trip to the debt market follows mega bond deals from US telco giant AT&T ($US22.5 billion) and British American Tobacco ($US17.25 billion), and this deal is the year’s fourth biggest following a $US17 billion offering from Microsoft. It also comes at a time when tech companies have been active debt issuers, including a debut offering from Tesla on August 11 as well as Apple, which sold its first Canadian-dollar maple bond also on Tuesday.

Amazon, whose identity straddles between a tech and retail company, has been the source of the latter’s industry’s problems as consumer preferences have shifted to shopping online instead of in stores. That’s what makes this offering attractive and was expected to be “very well-received,” said Matt Brill, a money manager at Invesco.

“You don’t want to own retail because of Amazon — this is the the source of everyone’s problems,” said Brill, who planned to participate in the deal. “You get the chance to buy the category killer.”

Buy recommendation

The bond sale also earned Amazon a higher analyst rating from CreditSights, which now rates the debt as outperform from underperform.

You get the chance to buy the category killer.

Matt Brill, money manager at Invesco

“We are comfortable buying Amazon’s bonds across the entire curve given its strong operating trends and competitive position in both its e-commerce and cloud computing businesses,” analysts led by Jordan Chalfin said in a report.

Bank of America, Goldman Sachs and JPMorgan managed the bond sale, the person said.

Amazon has been an infrequent issuer in the investment-grade bond market, with only $US7.8 billion of debt outstanding as of June 30. It’s rated Baa1 by Moody’s Investors Service and four notches higher by S&P Global Ratings.

“Despite the increase in debt, the Whole Foods acquisition is an immediate credit positive for the company on a variety of fronts,” Moody’s analyst Charlie O’Shea said in a report on Monday, revising Amazon’s outlook to positive from stable, meaning the ratings agency is considering upgrading its recommendation.

“Whole Foods provides Amazon with greater scale and a crucial brick-and-mortar presence in a segment where it has been trying to grow.”


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