Corporate Finance Course

it's about Whole Foods purchase by Amazon.

below are the questions need to be answered, also the documents are attached.

QUESTIONS:

1.The investment thesis on AMZN has ALWAYS been that the company has traded off rising retail costs for declining technology costs. That said, the company has clearly signaled its intent to more aggressively invest in new growth options and some analysts have for some time identified Groceries as one of the most logical places for Amazon to expand into. So with that as backdrop, how do you view this development? Is it surprising?Remember you should support your answer with data.

2.What does Amazon see in Whole Foods transaction?Give 3 reasons why AMZ is buying WHF.

3.In the Deutsche Bank Report (page 3) under the title 'AMZN/SFM is a success...so why AMZN + WFM?Five key reasons are highlighted. Which is the most important one for you and why.

4.In that same report, page 11, we have the impact of WHF on AMZ valuation.

a.Explain the differences between Pre-Deal and After Deal Valuation

b.Why the post-deal valuation has the same value with and without synergies

5.Would you invest in Amazon at 1,000 USD? Why?

9/8/2017 The Whole Foods fight is Amazon's chance to conquer supermarkets Whole Foods Market Inc The Whole Foods ght is Amazon's chance to conquer supermarkets Deal hands Bezos new customers and the means to solve online grocery problems In buying Whole Foods, Amazon is also acquiring a large laboratory for its experiments in bricks-and-mortar retail FT montage / Getty JUNE 16, 2017 by: Mark Vandevelde and Leslie Hook With its $13.7bn deal to buy Whole Foods Market, Amazon may finally have answered a question that has stumped executives in charge of its nascent groceries business. How can an online supermarket that has fewer customers than a provincial convenience store chain buy enough food to stock a virtual cornucopia? Amazon dominates online shopping in the US, with $136bn in annual revenues. But its grocery delivery service has made faltering progress since launching in 2007. \"Jeff Bezos knows that groceries are half of shopping, and he knows he has to sell them,\" says the founder of a rival online retailer. \"But it's very hard to do online, and so far he hasn't cracked it.\" Limited to London in the UK and to densely populated metropolitan areas in the US, Amazon Fresh has struggled to win customers. Some reviewers have complained that the online store lacks the range found in regular supermarkets or the contents of its virtual shelves, once ordered, turn out to be unavailable. Analysts say such shortcomings were inevitable for a niche online operator in a competitive market with punishing economies of scale. By acquiring Whole Foods, which sells $16bn worth of high-end food from 400 stores across the US, Mr Bezos has given himself the means to solve them. https://www.ft.com/content/71dfaf2e-52ae-11e7-bfb8-997009366969 1/5 9/8/2017 The Whole Foods fight is Amazon's chance to conquer supermarkets \"If they want to be serious in food they have to have volume,\" says Neil Saunders, managing director at GlobalData Retail, a consultancy. \"Online food delivery doesn't make money even for Amazon and this gives them the economies of scale. The only way they could do it was to buy someone.\" Whole Foods, which has earned the nickname \"whole pay cheque\" for selling mouth-watering food at eye-watering prices, embodies a different attitude to price from Amazon. The Seattle-based ecommerce group now offers those in receipt of food stamps a discount on its Prime membership package, which includes benefits such as free delivery and video streaming, and scours the web to match the lowest prices. By contrast, Whole Foods sells $5.99 bags of kale chips and $4.99 Valencia oranges. But adding a range of premium foods could attract more affluent shoppers to Amazon Fresh. And an enlarged customer base would, in time, enable Amazon to sell a wider range of grocery items that could broaden its appeal. Mr Saunders says that, in buying Whole Foods, Amazon has changed its mind on bricks-and-mortar. They have been changing their mind on it for the last four to ve years Amazon is also acquiring a larger laboratory for its MARK MAHANEY, RBC CAPITAL MARKETS mortar,\" says Mark Mahaney, analyst at RBC experiments in bricks-and-mortar retailing, which have multiplied over the past two years but only on a very small scale. \"Amazon has changed its mind on bricks-andCapital Markets. \"They have been changing their mind on it for the last four to five years, they have been going through an evolution.\" This is a profound shift for a company whose previous thesis was that physical store costs would increase over time, while technology costs declined. Mr Mahaney recalls presentations from Mr https://www.ft.com/content/71dfaf2e-52ae-11e7-bfb8-997009366969 2/5 9/8/2017 The Whole Foods fight is Amazon's chance to conquer supermarkets Bezos some 15 years ago that illustrated this. \"The pitch was always that Amazon is a trade off between rising physical store rental costs and structurally declining technology costs,\" he says. This year the company opened two grocery pick-up kiosks in Seattle, where customers can order groceries online and then pick them up without getting out of their car. Amazon has also been testing a no-checkout convenience store, Amazon Go, which rings up a bill automatically as customers pick items off the shelves. The store opened to Amazon employees in December but a planned public launch in the spring did not take place. Until Friday, supermarket executives had dismissed Amazon's threatened encroachment on their turf, having escaped largely unscathed from an onslaught that has obliterated whole categories of bricks-and-mortar stores, from booksellers to electronics retailers. \"Amazon wanted us to sell them food [for their Fresh service in London],\" says an executive at one of Britain's biggest supermarket groups, before Friday's deal was announced. \"We told them to get lost,\" the executive adds. \"We've got a supply chain they can't replicate. We aren't going to let them use it.\" News: Amazon agrees to buy Whole Foods for $13.7bn Lex: Grain of truth Video Lex on Whole Foods takeover FT Alphaville: Whole Foods v the activists Markets: Investors gobble up Whole Foods bonds https://www.ft.com/content/71dfaf2e-52ae-11e7-bfb8-997009366969 3/5 9/8/2017 The Whole Foods fight is Amazon's chance to conquer supermarkets News: John Mackey attacks 'greedy bastard' investor Jana Analysis: Whole Foods woes whet rival's appetite for a deal Amazon eventually struck a supply deal with Wm Morrison, Britain's fourth-biggest supermarket chain. John Mackey, Whole Foods' founder and chief executive, is among the grocery sector veterans who once believed that large-scale operations amounted to an unbreachable defence against online insurgents, telling Bloomberg in a 2015 interview that Mr Bezos's push into grocery delivery would be \"Amazon's Waterloo\". But supermarket shareholders fled the battlefield on Friday. Kroger, the second-biggest US supermarket chain, lost 13 per cent of its value after the deal was announced. Supermarkets across the US, Britain and continental Europe suffered smaller declines. Meanwhile, Amazon shares notched up a 3 per cent gain, adding about $13bn to its market capitalisation. Investors, it seems, are still betting on the conqueror. 'Greedy bastard' poised for $300m payout The activist hedge fund Jana Partners, labelled a \"greedy bastard\" by the chief executive of Whole Foods, could profit by roughly $300m from Amazon's planned $13.7bn takeover of the high-end grocer, writes Lindsay Fortado. The hedge fund has been clamouring for sweeping changes at Whole Foods that would address \"chronic underperformance for shareholders\" since it announced in April it had amassed a near 9 per cent stake in the company. One of those solutions was a possible sale, but the fund also called for management and strategy changes. In a blunt interview with the magazine Texas Monthly, published on Monday this week, founder and chief executive John Mackey blasted Jana. He said the fund was trying to destroy his reputation and would have to \"knock Daddy out if they want to take\" over the company. \"These people, they just want to sell Whole Foods Market and make hundreds of millions of dollars, and they have to know that I'm going to resist that,\" he told the magazine. https://www.ft.com/content/71dfaf2e-52ae-11e7-bfb8-997009366969 4/5 9/8/2017 The Whole Foods fight is Amazon's chance to conquer supermarkets The company appeared to take several steps to appease disgruntled shareholders, including replacing its chief financial officers, chairman and several board members in May. Jana rejected Whole Foods' peace offer to appoint two members to the board in exchange for a pause in the fund's public agitations. But the company has agreed to sell itself to Amazon for $42 a share, giving the hedge fund Whole Foods' third-largest shareholder a hefty return. By the Financial Times's calculations, the profit could be about $300m, because when Jana announced its stake, shares had opened at $31, and the fund bought more than 26m shares. However, that does not take into account any shares that were bought at a cheaper price leading up to the announcement, some stock that they have already sold, or any costs for leverage or hedging. Jana did not immediately respond to a request for comment on how much they stood to make. According to Reuters, the hedge fund had returned 4.6 per cent as of late May. Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web. https://www.ft.com/content/71dfaf2e-52ae-11e7-bfb8-997009366969 5/5 9/8/2017 Amazon agrees to buy Whole Foods for $13.7bn Whole Foods Market Inc Amazon agrees to buy Whole Foods for $13.7bn Investors sell shares of rivals as ecommerce company upends US grocery sector Whole Foods shares surged 28 per cent after the announcement that Amazon has agreed to buy the chain Reuters JUNE 16, 2017 by: Anna Nicolaou, James Fontanella-Khan and Adam Samson in New York and Leslie Hook in San Francisco Amazon is buying upmarket grocer Whole Foods Market for $13.7bn, in the largest deal so far for Jeff Bezos as his ecommerce group seeks to exploit its online scale to challenge the likes of Walmart in food retailing. Buying Whole Foods, the biggest premium grocer in the US, will radically accelerate Amazon's ambitions in the $800bn US food and grocery sector, where the Seattle-based group has been trying to make inroads with grocery deliveries. Having watched Amazon upend sectors from bookstores to cloud computing and film on its two-decade march to a $467bn market capitalisation, investors reacted by marking down the shares of bricks-and-mortar grocery rivals from the US to Europe. Walmart, the world's biggest retailer, dropped 4.7 per cent to $75.24. Wholesaler Costco fell 7.2 per cent to $167.11, while discount store Target jettisoned 5.1 per cent to $52.61. Kroger, one of the world's biggest supermarket chains, had 9.2 per cent wiped from its share price to $22.29. https://www.ft.com/content/bb5a7dae-5296-11e7-a1f2-db19572361bb 1/4 9/8/2017 Amazon agrees to buy Whole Foods for $13.7bn Amazon will pay $42 a share for Texas-based Whole Foods in an all-cash deal that includes the group's debt. Whole Foods, which has been nicknamed \"whole pay-cheque\" for its high prices, has had samestore sales fall for almost two years. Its revenues rose 1.1 per cent to $3.7bn in its most recent quarter on profits down 30 per cent to $99m. Amazon will finance the deal with debt, including a bridge loan financed by Goldman Sachs and Bank of America, the company said in a filing with US securities regulators. Whole Foods shares surged 29.1 per cent on Friday to $42.68, while Amazon rallied 2.4 per cent to $987.71. Charlie O'Shea, analyst at Moody's, said the deal was a \"transformative transaction, not just for food retail, but for retail in general\". The deal will give Amazon a company that has built most of its businesses online a much more significant bricks-and-mortar presence. The online retailer has been running its own grocery delivery programme, AmazonFresh, since 2007 and has been experimenting with grocery pick-up kiosks in Seattle. It has also opened a handful of physical bookstores in the US during the past year. John Mackey, Whole Foods' founder and chief executive, has been under pressure to sell his business from activist investors Jana Partners, which in April bought a 9 per cent stake. In April, Jana attacked Whole Foods' management for \"chronic underperformance for shareholders\Deutsche Bank Markets Research North America United States TMT Date Industry Internet / Grocery Internet 19 June 2017 Industry Update Lloyd Walmsley Shane Higgins WFM + AMZN: Making Fresh Prime Research Analyst Research Analyst (+1) 212 250-7063 (+1) 212 250-6620 lloyd.walmsley@db.com shane.higgins@db.com Game-Changing for Amazon and the Retail Industry We see AMZN's WFM proposed acquisition as a catalyst transforming AMZN's Fresh business, opening up new threats to the retail industry, and changing our views on what else might be possible strategically from AMZN. We see this expanding AMZN's TAM and likely success in groceries and enabling more last-mile-delivery infrastructure for AMZN, if the deal materializes. Matt Diamond, CFA Why Amazon is Buying WFM We believe Amazon is buying WFM for (1) the strong brand in organic/healthy foods which should accelerate AMZN Fresh adoption, (2) the unmatched WFM supplier relationships in quality food which AMZN can scale nationally, (3) the excellent real estate accelerating the AMZN time to market in key regions, (4) symbiotic leadership at WFM and AMZN and (5) the right timing for WFM to sell and for AMZN to leverage WFM to accelerate its grocery strategy. Research Associate (+1) 904 520-4899 chris.kuntarich@db.com Implications for Grocery Sector The AMZN/WFM transaction sent shock waves across the U.S. grocery space, and we believe it significantly enhances AMZN's fresh offering and credibility, which should drive incremental Fresh/grocery customers, particularly in core AMZN/WFM markets along the West Coast and Northeast/Mid-Atlantic, which represent a large share of WFM's business. To remain competitive, grocers in these markets will need to sharpen their price/value positioning and offer delivery and/or other convenient options, such as click-and-collect. The AMZN/WFM transaction, in combination with growth in the hard discounters (Aldi, Lidl) and Walmart's recent price investments should pressure many traditional grocers, driving further consolidation in the space. Key analysis in the note In this note we outline why we think AMZN is making this move, look at the footprint overlap of WFM and AMZN food distribution, review the potential US online TAM of the $669B grocery business and what AMZN + WFM might be able to capture. If 25% of US grocery sales migrated online and AMZN could obtain market share consistent with its ~41% US share of eCommerce, it could add $69B of revenue. We also provide an overview of AMZN's existing grocery product and footprint and outline a scenario accretion/dilution analysis pointing to a potential 3.1% EPS and 0.6% FCF accretion. Research Associate (+1) 415 617-3345 matt.diamond@db.com Chris Kuntarich Seth Gilbert Research Associate (+1) 212 250-1268 seth.gilbert@db.com Companies Featured Amazon.com (AMZN.OQ),USD987.71 Buy 2016A 2017E 2018E EPS (USD) 10.18 11.96 16.14 P/E (x) 68.7 82.6 61.2 EV/EBITDA (x) 25.4 30.0 22.5 Whole Foods Market (WFM.OQ),USD42.68 EPS (USD) P/E (x) EV/EBITDA (x) Hold 2016A 2017E 2018E 1.55 1.30 1.36 20.1 32.7 31.4 8.0 11.2 10.6 Source: Deutsche Bank Valuation and Risks Our WFM PT is $42, based on Amazon's all-cash acquisition price. For AMZN, our $1,150 PT is based on a blended avg of 18x EBITDA and 3.0% FCF yield for retail and 8x rev multiple for AWS. Risks for AMZN include competition, margin compression, higher fulfillment/shipping costs, potential slowdown in retail and AWS business, and acquisition integration. Downside risks for WFM include risks to closing the AMZN merger or competition. Upside risks include another bidder offering over $42/shr or an acceleration in comps. ________________________________________________________________________________________________________________ Deutsche Bank Securities Inc. Distributed on: 19/06/2017 06:21:00 08:55:00 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. 0bed7b6cf11c 19 June 2017 Internet Internet / Grocery AMZN's Dive Into Grocery We see Amazon's proposed acquisition of Whole Foods Market (WFM) helping accelerate the company's effort to expand more into grocery delivery by (1) bringing instant credibility to the company's fresh food offering in AmazonFresh and Prime Now through the WFM brand (an important addition considering 40% of online food shoppers aim to lead healthier lifestyles according to comScore), (2) adding a supply chain in ultra high quality fresh food, (3) bringing a broad store footprint that overlaps well with Amazon's Prime customers (Figure 1) and can help accelerate the company's ownership of the end user around grocery delivery. Better traction in high-frequency grocery delivery stands to help Amazon's unit economics around last mile delivery infrastructure and logistics, as the company can now amortize more gross profit dollars across its growing last mile infrastructure. In the near term we see Amazon likely to leverage the store infrastructure and its proximity to many Amazon Prime customers to accelerate its migration of Prime customers to food orders. The map on page 6 (Figure 3) shows clearly how the WFM footprint greatly expands Amazon's reach with fresh food. With fresh food ordering beginning to take off, we think adding WFM allows Amazon to capture users early in the online food ordering game before habits develop firmly. . If a competitor grew strong in this high-frequency, lower margin category, moving up the stack to other higher margin and lighter weight low-frequency items could threaten AMZN's core. Over time, we expect Amazon to leverage the WFM brand and supply chain to source high quality food and build demand for it, but ultimately leverage Amazon's expertise to drive efficiency in the logistics efforts, fulfilling orders outside of the WFM store footprint. Over time we see Amazon also innovating around the store experience to (1) increase core sales of WFM products by making it easier to buy in stores and changing the store experience. We can imagine using an Amazon mobile app in the store and seeing Amazon suggest complementary items (e.g,. grilling tools) that can be shipped directly to the home even if they are not carried in the WFM store. The offline data from store purchases can be tied to Prime accounts and used to improve Amazon's merchandizing. Amazon-Sprouts Partnership as a Roadmap Sprouts (SFM) currently has a partnership with AMZN that includes 12 SFM stores, expanding to 20 by year end. Last week, we hosted Sprouts CFO Brad Lukow at our dbAccess Global Consumer Conference in Paris, where he discussed the rationale behind the partnership with Amazon Prime Now (APN). SFM sees several benefits. First, the substantial Millennial demographic values an online shopping experience. And second, Sprouts' brand stands for topquality fresh products, which is a key consideration for online customers, who want assurance that they are getting only the highest-quality natural or organic products. Through the APN partnership, customers can go online and order pretty much the full assortment of products that a participating SFM store offers. The items Page 2 Deutsche Bank Securities Inc. 19 June 2017 Internet Internet / Grocery are all sourced and picked in-store, so SFM can leverage its existing store base. They are then delivered to customers free of charge within two hours, as the customers are APN customers. Many of the orders are coming from zip codes beyond SFM's customary trade area, indicating that the APN partnership is driving incremental sales. AMZN/SFM is a success...so why AMZN + WFM? Given the early success of the SFM/AMZN partnership, why would AMZN purchase WFM? We highlight five key reasons: 1) Strong Natural/Organic and Healthy Brand. WFM has a very strong brand as a leading innovator in natural, organic, and healthy food - AMZN can leverage WFM's brand and strong reputation to gain instant credibility as a retailer of fresh and healthy food, which is extremely important in the fresh category. This should jumpstart attach rates of AmazonFresh, in our view, particularly among Prime customers near WFM stores. We believe it is important for Amazon to gain share early with grocery delivery while Internet penetration in the category remains low as habits are forming. We also believe grocery delivery ties in well with Alexa, enhancing the utility of both Alexa and online grocery delivery. 2) Unmatched Supplier Relationships. WFM has established very strong relationships with growers, ranchers, fisherman, etc., who are closely aligned with WFM's mission and unmatched standards for quality and transparency. It would likely take several years for AMZN to develop a similar network. Here, again, WFM would help accelerate AMZN's time to market in the critical nascent days of online grocery ordering. 3) Excellent Real Estate. WFM has about 460 stores today across the U.S. (and some in the UK and Canada), with the vast majority of stores located in very attractive real estate locations (high-income, hightraffic areas) that complement AMZN's large and growing Prime Membership base. AMZN could utilize WFM's stores as last-mile distribution points given their close proximity to the majority of Prime Customers. This could improve the quality and economics of grocery delivery. In addition, WFM obtains below-market lease terms when anchoring a center relative to other grocers. The WFM locations also provide AMZN with opportunities to strengthen engagement and loyalty through trial and experience. For example, a Prime Customer might one day go into her local Whole Foods, sample some new wine and have a case of it shipped to her home - all without having to check-out (Amazon Go). 4) Visionary Leadership. John Mackey will remain CEO of Whole Foods, but without the constant scrutiny as a public company, which should give him greater flexibility to lead the business he founded in 1980. Over nearly four decades, Mackey has shaped Whole Foods around his vision of providing natural, organic and healthy food to the masses - and in the process, he has helped change the way consumers eat and how food is produced. Deutsche Bank Securities Inc. Page 3 19 June 2017 Internet Internet / Grocery WFM's scale and mission have influenced how ranchers feed their livestock, how vegetables are grown and how fisherman fish, all with a purpose of delivering healthy, fresh food that is free of unwanted additives (e.g., antibiotics, preservatives), which, until more recently, had become ubiquitous in the country's food supply-chain. Mr. Mackey believes in the power of education and transparency, which drive knowledgeable consumers to demand higher standards. Once the demand for healthier and more ethically-sourced food grows, suppliers inevitably follow. This loop reinforces itself over time, as suppliers gain efficiency and scale, driving costs lower and enabling even price-sensitive consumers access to natural, organic, and healthy food. Greater access to healthier food could also help mitigate a number of larger societal problems, particularly growth in chronic illnesses and escalating healthcare costs. By aligning with AMZN (and Jeff Bezos, another visionary), WFM will be able to continue to wield great influence over the way people eat, especially as grocery shopping goes increasingly online. Mackey's values in healthy food should mesh well with Amazon's culture of long-term focus, willingness to invest and emphasis on customer satisfaction. We see WFM helping accelerate and provide credibility to AMZN's fresh grocery delivery ambitions, and we see WFM as a brick and mortar store where AMZN can complement its foundation of high quality fresh food with innovative digital enhancements to the shopping and delivery experience. 5) The Right Timing. We believe, the timing was right for WFM to sell. Unlike SFM, WFM's business has been struggling for the past several quarters due to increased competition within the natural/organic business. Weak sales and depressed earnings led to pressure from activist investors, who demanded that WFM make both leadership and operational changes and consider strategic alternatives. From AMZN's perspective, as grocery delivery becomes more mainstream it becomes more critical to accelerate the company's brand perception, distribution footprint and supply chain, and WFM helps improve the company across all of these key attributes. AmazonFresh DC Locations vs. Whole Foods Stores Below, we show three maps: 1) WFM's store count by state; 2) the AmazonFresh Distribution Center (DC) network; and 3) a map overlaying the AmazonFresh DC network with WFM's 30 largest markets by store count. Figure 1 below shows WFM's store count by state. Note that almost a quarter of WFM's U.S. stores are located along the West Coast (CA, OR, and WA), while another 20% are in the Northeast (NY, NJ, PA, and New England). Page 4 Deutsche Bank Securities Inc. 19 June 2017 Internet Internet / Grocery Figure 1: Whole Foods Stores by State (436 total US stores as of FY16 end) WA 10 VT MT OR 9 ID 1 ND WY 85 CO 20 AZ 11 KS 4 OK 3 NM 4 CT 9 NJ 15 DE MD 9 VA 13 D.C. 4 2 NC 12 TN 6 AR 2 SC 4 AL 3 MS 1 TX 29 WV KY MO 3 MA 31 RI 3 PA 10 OH 9 IN 4 IL 26 NH 2 NY 17 MI 7 IA 1 NE 2 UT 5 5 WI 3 SD NV CA MN 6 ME 1 GA 10 LA 6 FL 26 *3 WFM locations in Hawaii Source: Deutsche Bank, Whole Foods Figure 2 shows the current Amazon Fresh DC network. Note that the bulk of the facilities are located in major West Coast and Mid-Atlantic/Northeast markets. Figure 2: AmazonFresh Distribution Centers (DCs) WA VT MT OR MN ID WY NY WI SD NE NV PA IL CO KS 4 AZ OK NM OH VA KY CT NJ DE MD WV MO D.C. NC TN AR SC MS TX IN NH 3 MI IA UT CA ME ND AL GA LA FL Source: Deutsche Bank, Amazon Deutsche Bank Securities Inc. Page 5 19 June 2017 Internet Internet / Grocery Finally, Figure 3 shows the location of AmazonFresh DCs along with WFM's 30 largest metro markets (map includes store counts by market). Two observations: 1) AMZN Fresh DCs lines-up very closely with WFM's leading markets, including LA, New York, San Francisco, Boston, among others; and 2) there is still a lot of white space opportunity for AMZN to expand its Fresh presence in some strong WFM markets, such as Tampa/Orlando, Miami, Phoenix, and Minneapolis. We believe the significant AmazonFresh/WFM overlap in the largest WFM markets should help AMZN quickly strengthen its Fresh offering and improve sales through the Fresh DCs. Figure 3: AmazonFresh DC Locations and Whole Foods Top 30 Markets with Store Counts Source: Deutsche Bank, Whole Foods, Amazon Ample Online Grocery TAM to Capture Amazon-Whole Foods strikes us as the catalyst to jump-start online grocery delivery. With Prime's already deep penetration in high-earning US households (we estimate 80% of US households earning over $50k annually hold Prime memberships), Amazon appears well positioned to penetrate grocery delivery. That said, the company has seen somewhat slow adoption in part because it lacks the footprint for Fresh delivery and consumers do not naturally think of Amazon for online food ordering. Page 6 Deutsche Bank Securities Inc. 19 June 2017 Internet Internet / Grocery Figure 4 below starts with the US's $669B grocery market and assumes a couple of scenarios 1) 25-40% of that could potentially shift online over time and 2) Amazon could get 41% share, consistent with its current US eCommerce share. These assumptions yield $69-111B in potential revenue in this category for Amazon over time, or 10-17% of the domestic grocery market. If we were to take these potential market sizes and look at this on a per US Prime household using today's estimated Prime subscribers, it implies roughly $1,245 to $1,992 of annual household grocery spend on Amazon, or roughly 30-50% of the typical US household's annual at-home food purchases. We believe Amazon could make further inroads with Prime, to 95% of US households earning over $50k annually and increase the annual grocery TAM. Taking the Prime adjusted spend per household and grossing it up assuming greater Prime penetration would increase the potential TAM to $82-131B. Figure 4: Potential Amazon grocery TAM Total US grocery sales Online at 25% penetration Online at 30% penetration Online at 40% penetration 25% 30% 40% Comment $669,000 Progressive Grocery Magazine $167,250 $200,700 $267,600 AMZN share of US eCommerce - 1Q17 AMZN Grocery $ at 25% online, AMZN current eCom share of 41% AMZN Grocery $ at 30% online, AMZN current eCom share of 41% AMZN Grocery $ at 40% online, AMZN current eCom share of 41% 25% 30% 40% 41.4% US Gov't Data, DB estimates $69,170 $83,004 $110,672 DB US Prime HH estimate Total households over $50k of income (m) US Prime members as a % of HH with >$50k 80% 55.6 69.5 Source: Statista 80% Annual Prime grocery spend per household (25% penetration) Annual Prime grocery spend per household (50% penetration) Annual Prime grocery spend per household (75% penetration) Assume 95% of households over $50k become Prime members Prime Adjusted TAM - 25% penetration Prime Adjusted TAM - 30% penetration Prime Adjusted TAM - 40% penetration $1,245 $1,494 $1,992 25% 30% 40% 66.0 $82,139 $98,567 $131,423 Source: US Census Bureau, Statista, Deutsche Bank estimates Taking a different approach, Figure 5 below looks at the top 10 markets for Whole Foods stores (based on television market populations and adjusted for regional differences in food sales) found that a +1ppt increase in Whole Foods market share in each market would yield an approximate +$2.2B increase in total sales to approximately $10B. Isolating the 10 regional markets yields a TAM of $217B of top TV markets where online penetration is likely to move most quickly, thus a 40% penetration of these markets to online with Amazon garnering at 41% share would equate to a still impressive $36B. Deutsche Bank Securities Inc. Page 7 19 June 2017 Internet Internet / Grocery Figure 5: Amazon-Whole Foods potential market (top 10 US television markets) Pre-merger TV Market Population (m) New York, NY 21.5 Los Angeles, CA 18.2 Chicago, IL 10.0 Philadelphia, PA 8.1 Dallas-Ft. Worth, TX 7.1 San Francisco-Oakland-San Jose, CA 6.8 Houston, TX 6.6 Atlanta, GA 6.6 Washington, DC 6.3 Phoenix, AZ 5.3 Total 96.6 WFM share (%) 3.7 3.3 4.4 2.3 2.5 9.1 2.8 1.3 3.5 1.6 Area per-capita food sales $2,373 $2,168 $2,099 $2,350 $2,099 $2,716 $2,008 $1,848 $2,784 $1,826 WFM per-capita share $89 $71 $92 $54 $52 $248 $57 $25 $99 $28 Total WFM implied market (m) $1,903 $1,288 $916 $434 $369 $1,682 $374 $162 $623 $151 $7,902 Total implied market (m) $51,030 $39,495 $21,020 $19,018 $14,994 $18,398 $13,270 $12,203 $17,606 $9,736 $216,770 Post-merger TV Market Population (m) AMZN-WFM share (%)* Area per-capita food sales AMZN-WFM per-capita share AMZN-WFM implied market (m) Total implied market (m) New York, NY 21.5 4.7 $2,373 $112 $2,414 $51,030 Los Angeles, CA 18.2 4.3 $2,168 $92 $1,682 $39,495 Chicago, IL 10.0 5.4 $2,099 $113 $1,127 $21,020 Philadelphia, PA 8.1 3.3 $2,350 $77 $624 $19,018 Dallas-Ft. Worth, TX 7.1 3.5 $2,099 $73 $519 $14,994 San Francisco-Oakland-San Jose, CA 6.8 10.1 $2,716 $275 $1,866 $18,398 Houston, TX 6.6 3.8 $2,008 $77 $507 $13,270 Atlanta, GA 6.6 2.3 $1,848 $43 $284 $12,203 Washington, DC 6.3 4.5 $2,784 $126 $799 $17,606 Phoenix, AZ 5.3 2.6 $1,826 $47 $248 $9,736 Total 96.6 Total $10,070 $216,770 $ gain $2,168 % gain 27% Source: Metro Market Studies, US Department of Agriculture, Deutsche Bank estimates *Assumed +1ppt gain in Whole Foods market share in each TV market following acquisition by Amazon **Assumed US national average of 2.58 persons per household (US Census Data and Statista) Online grocery penetration overall is clearly nascent worldwide. Figure 6 highlights FMCG (fast-moving consumer goods) online penetration rates by country from Kantar Worldwide's 2016 Online Food Report. In addition to penetration rates, the report notes that 55% of customers repeat purchasing groceries online do so via the same merchant, and that in the UK, one of the most developed online grocer markets worldwide, online purchases average $59 vs an in-store baskets of $15. As such, we believe these findings further reinforce the importance of integrating WFM across the Amazon platform early in the online grocery story. Figure 6: FMCG market penetration by country, 2016 Source: Kantar Worldwide Page 8 Deutsche Bank Securities Inc. 19 June 2017 Internet Internet / Grocery AMZN / WFM Looks Accretive at First Blush Below we provide a scenario accretion/dilution analysis with limited assumptions on how Amazon will operate WFM. While we see the WFM transaction as more strategic in nature, we do not expect Amazon to simply tweak the WFM business toward improvements in distribution. Rather, we see Amazon leveraging the brand and supply chain to enhance its own AmazonFresh offering, and we see the company leveraging its technology to re-imagine how WFM operates its stores. As such, we do not look at this deal solely in terms of simple accretion/dilution math, but we do believe the analysis helps understand the more direct impact of the deal. With a simplified 10% revenue synergy assuming Amazon funnels more demand through WFM stores, we see the deal as nicely accretive to EPS and slightly accretive to FCF. Amazon has not provided any guidance on how the all-cash transaction will be financed; therefore our base case assumes a 50/50 mix of cash on hand and debt in our accretion/dilution analysis. We assume the cash on hand would have earned 1%, above Amazon's more recent 0.6% return, reflecting a conservative take on future return on cash reflecting a rising interest rate environment. For debt, we assume the company's existing cost of debt at 3.4%. While we do believe it possible for Amazon to finance the deal entirely with cash on hand, we estimate about one-third of cash is held offshore (based on mix of currencies reported in 10-K as a proxy) reducing its flexibility to use onshort cash. In addition, we assume it will use a mix of cash and debt to preserve flexibility for other acquisitions. Figure 7 is a pro-forma analysis of our estimated impact that the acquisition will have on Amazon's EPS and FCF/share. Deutsche Bank Securities Inc. Page 9 19 June 2017 Internet Internet / Grocery Figure 7: Accretion to EPS and FCF (Pro-forma) AMZN Retail Revenue Whole Foods Revenue 10% Synergy Total Retail Revenue 2018 $176,570 $16,890 $1,689 $195,149 AMZN Retail EBITDA Whole Foods EBITDA Synergy EBITDA @ WFM EBITDA Margin Total Retail EBITDA $10,201 $1,313 $131 $11,645 AMZN total NI Whole Foods NI Synergy NI @ WFM Margins Tax adj. incremental interest expense Tax adj. lost interest income Total Net Income $7,999 $433 $43 $177 $52 $8,246 AMZN FCF Whole Foods uFCF Syngery FCF @ WFM Margins Tax adj. incremental interest expense Tax adj. lost interest income Total Retail FCF $20,251 $325 $33 $177 $52 $20,379 Pro-forma EPS Pro-forma FCF/Share $16.64 $41.12 Current EPS Current FCF/Share $16.14 $40.86 Accretion to AMZN Shares EPS FCF 3.1% 0.6% Source: Deutsche Bank estimates and company reports Figure 8 lays out the 26% premium that Amazon is offering for WFM and the deal's implied FY18 EBITDA valuations. WFM's FY18 deal multiple assuming no synergies is 7.8x below our 18x target valuation multiple for Amazon's retail EBITDA. Although this valuation level is immediately accretive to Amazon, we believe it's important to note that our pre-deal Amazon FY17/19 revenue CAGR was 12% vs WFM's 2.8%. While we believe that integrating WFM into Amazon will close this gap as a larger percentage of sales come from online customers in the future, we do not believe that WFM's margin expansion will be a nearterm factor to the Amazon grocery store given the competitive nature of the grocery space and large brick-and-mortar footprint. Figure 8: Whole Foods EBITDA Multiples WFM Implied Valuations Share Price Implied EV/EBITDA Multiple FY18 EBITDA (DB est.) FY18 Net Debt (DB est.) Enterprice Value Pre Deal $33.37 8.1x $1,313 $73 $10,595 Implied Valuation at Deal Price No Synergy 10% Rev. Synergy $42.00 $42.00 10.2x 9.2x $1,313 $1,444 $73 $73 $13,354 $13,354 Source: Deutsche Bank Page 10 Deutsche Bank Securities Inc. 19 June 2017 Internet Internet / Grocery While we believe that Amazon's decision to acquire WFM could be a harbinger for a change in acquisition strategy at Amazon, Figure 9 highlights the limited impact that the acquisitions will have on Amazon's implied valuation and enterprise value. Assuming a 10% revenue synergy, Amazon's implied EBITDA multiple decreased by half a turn, assuming a static share price. Figure 9: Impact to Amazon's Implied Valuation (Pro-forma) AMZN Implied Valuations on FY18 Share Count Pre-Deal Share Price $961.00 EV/EBITDA 19.3x 2Q17 Net Debt ($15,121) FY18 EBITDA $23,856 AWS EBITDA $13,656 Retail EBITDA $10,201 Enterprise Value $461,144 Implied Valuation at Deal Price No Synergy 10% Rev. Synergy $961.00 $961.00 18.9x 18.8x ($1,257) ($1,257) $25,169 $25,301 $13,656 $13,656 $11,514 $11,645 $475,008 $475,008 Source: Deutsche Bank estimates and Amazon company reports We note that the share price move of $26.71 per share higher the day of the announcement equates to $13.2B of market cap increase, almost the same amount the company is paying for WFM, suggesting investors like this transaction. We make no changes to our estimates for Amazon pending the close of the transaction. Deutsche Bank Securities Inc. Page 11 19 June 2017 Internet Internet / Grocery Figure 10: Amazon acquisitions, June 1999 - March 2017 Date 22-Jul-09 25-Aug-14 19-Mar-12 27-Mar-17 27-Apr-99 8-Nov-10 3-Sep-15 22-Jan-15 31-Jan-08 23-May-99 29-Mar-13 30-Jun-10 11-Jun-99 7-Oct-10 19-Aug-04 17-Apr-13 4-Oct-99 9-Jan-17 15-Jun-12 23-Nov-16 20-Sep-16 14-Jul-16 16-Feb-16 1-Dec-15 25-Sep-15 30-Apr-15 10-Apr-15 10-Apr-15 12-Mar-15 27-Oct-14 10-Apr-14 6-Feb-14 1-Oct-13 13-May-13 13-May-13 24-Jan-13 2-Jul-12 4-Jun-12 31-Jan-12 28-Dec-11 8-Sep-11 28-Jul-11 4-Jul-11 Acquired Zappos Twitch Kiva Systems Souq.com Exchange.Com Quidsi Elemental Technologies Annapurna Labs Audible Alexa Goodreads Woot Accept.Com BuyVIP Joyo.com Evi Convergence Corporation harvest.ai LOVEFiLM Biba Angel.ai Cloud9 IDE EMVANTAGE Payments Orbeus Safaba Translation Solutions Clusterk Amiato Shoefitr 2lemetry Rooftop Media Comixology Double Helix Games TenMarks Education Screentech Screentech IVONA Text-To-Speech UpNext Avalon Books TeachStreet Quorus Yap Pushbutton The Book Depository Amount $1.2B in Stock $970M in Cash $775M in Cash $650M (terms undisclosed) $645M in Stock $545M in Cash & Stock $500M in Cash $370M (terms undisclosed) $300M in Cash $250M in Stock $150M (terms undisclosed) $110M in Cash $101.7M (terms undisclosed) $78M (terms undisclosed) $75M in Cash & Stock $26M (terms undisclosed) $23M in Stock $20M (terms undisclosed) $2.5M in Cash & Stock Unknown Unknown Unknown Unknown Unknown Unknown Unknown Unknown Unknown Unknown Unknown Unknown Unknown Unknown Unknown Unknown Unknown Unknown Unknown Unknown Unknown Cash Unknown Unknown Source: FactSet Overview of Amazon's Existing Grocery Related Operations AmazonFresh AmazonFresh was launched in 2007 and continues to be a pioneer in the online ordering grocery market. Fresh is only available in select cities for a fee of $14.99/month in addition to the Amazon Prime membership fee, currently $99/year. The monthly fee enables the customer access to over 500k items that range from bananas and raw chicken to dog food and can be delivered direct to your home. Today, Fresh serves approximately 13 cities in the US and parts of Tokyo, central and eastern London, and Germany (Berlin and Potsdam). Back in late 2016 membership changed from an annual cost of $299 to $14.99/month however the customer must be a Prime subscriber. The change in cost is only $20/year less than before however you can cancel the $14.99 monthly charge at any time. This allows customers to not feel locked in having to pay $299 upfront for the ability to shop for groceries while enticing current customers of Page 12 Deutsche Bank Securities Inc. 19 June 2017 Internet Internet / Grocery Prime to expand the relationship with Amazon. By comparison a membership is only $60/year, Instacart membership is $149/year, and Express membership is $95/year. Some of these competing services delivery fees while Fresh only charges a $10 delivery fee if the order under $40. Costco Google charge total is When ordering from AmazonFresh the customer has three options: attended delivery, doorstep delivery, and pickup. Choosing the best option will enable the food to arrive fresh and not spoiled. If the customer will be home or has a doorman/security guard available to take delivery of the order selecting attended delivery is the best option. Doorstep delivery is best for customers who will not be home to take delivery immediately and do not have a doorman or security guard that can take delivery of the order. For doorstep delivery, Fresh packages the order in temperature-controlled totes, holding it at a suitable temperature until the customer is able to take delivery and store the order as needed (the customer stores the totes until the next delivery occurs). At this time the customer leaves the totes outside and Amazon will pick them up for reuse. Pickup (Figure 11) is available at select locations in Seattle with no order minimum and can be picked up in as little as 15 minutes according to the Amazon website. The customer doesn't have to enter the store or wait on line as Amazon loads the groceries directly into the car. Figure 11: AmazonFresh Pickup Source: Deutsche Bank, Amazon.com Most items are sold as first-party (Figure 12) however Fresh does have selection of third-party items available under the \"Local Market\" branding (Figure 13). We see 804 items available for the Local Market delivery in New York City from 16 different vendors. Deutsche Bank Securities Inc. Page 13 19 June 2017 Internet Internet / Grocery Figure 12: First-Party AmazonFresh Sale Source: Deutsche Bank, Amazon.com Page 14 Deutsche Bank Securities Inc. 19 June 2017 Internet Internet / Grocery Figure 13: Third-Party Amazon Food Sale under \"Local Market\" Source: Deutsche Bank, Amazon.com Deutsche Bank Securities Inc. Page 15 19 June 2017 Internet Internet / Grocery Figure 14: Third-Party AmazonFresh Sale Source: Deutsche Bank Amazon Prime Pantry Under the Amazon Prime Pantry branding Amazon offers delivery of nonperishable groceries and household products in everyday package sizes. All prime members in the contiguous United States can enjoy this service (excluding delivery to P.O. boxes, APO/FPO, and Amazon Lockers) with no additional monthly membership fee. Pantry boxes use ground shipping and therefore will not arrive in the 2 day shipping window that Amazon Prime members are accustomed to. Pantry orders are not combined with orders from Amazon.com or Fresh and are shipped from \"Prime Pantry fulfillment centers that is assigned to your zip code\" (Amazon.com). Prime Pantry boxes vary in size and weight holding a maximum of 45 pounds or 4 cubic feet of product (Figure 15). Every product has been meticulously measured and weighed to provide perspective on how much room items will take up in the box. There is no minimum order amount or item count for delivery and Amazon notes the box could be anything from the size of a shoe box to as large as a suitcase. Prime Pantry Customers enjoy \"low prices and additional savings with hundreds of coupons\" (Figure 16). We found the products to be reasonably priced especially for the New York City area where grocery store prices tend to be slightly more expensive. The delivery fee is a $5.99 flat fee or free with 5 qualifying items (also Figure 16). Amazon's website notes there is a selection of thousands of qualifying items for free shipping. Page 16 Deutsche Bank Securities Inc. 19 June 2017 Internet Internet / Grocery Figure 15: Prime Pantry Source: Deutsche Bank, Amazon.com Deutsche Bank Securities Inc. Page 17 19 June 2017 Internet Internet / Grocery Figure 16: Free shipping and coupons Source: Deutsche Bank, Amazon.com Amazon Prime Now Amazon Prime Now is a free 24/7, complementary service to Amazon's $99/yr. Prime service. It operates as a standalone website and app but is positioned as a beneficial service to Prime members (Figure 17). Through Amazon Prime Now, members are able to order a wide variety of items ranging from toiletries to groceries/restaurant foods that will be delivered within two hours. Now users also have the optionality to pay $7.99 to ensure that their order arrives within one hour. Due to the utility of the service, especially in busy city areas, Prime Now has rapidly expanded from its one zip code in NYC in 2014 to over 45 cities in 8 different countries. As one can expect, in order to guarantee one-hour delivery, Amazon needs to have fulfillment hubs near many zip codes participating in Now. These Prime Now hubs are different than traditional Amazon fulfillment centers in that they are very close to cities, they are 30-50 thousand sq. ft. (traditional fulfillment centers are over 1 million sq. ft.), and they are operated by human pickers rather than Kiva bots. In order to fulfill the order, these human pickers are given an optimal route to navigate the warehouse and eventually place all ordered items in a brown Amazon bag. Last mile delivery servicemen then pick up the bag on the loading dock and drive the package to the customer's doorstep. Amazon utilizes the Prime Now hubs for more commoditized items, but as mentioned, Prime Now offers groceries and restaurant foods (Figure 18). The delivery process for both grocers and restaurateurs is quite similar in that Page 18 Deutsche Bank Securities Inc. 19 June 2017 Internet Internet / Grocery Amazon sends them an order, the grocers and restaurateurs fulfill the order, then an Amazon Prime Now delivery person comes and picks up the order and delivers it to the customer. While many grocers and restaurateurs participate in the program, Amazon is quite selective with the Now partners as its reputation is contingent on the partners fulfilling the order in a timely manner. Thus, while most grocers and restaurateurs see the partnership as valuable to increase demand for their product, Amazon does not willingly partner with everyone. Amazon is also very selective with its third-party partners as well. Especially due to Amazon Prime Now's quick inventory turnover rate, third-party partners need to ensure adequate stocking of Prime Now hubs. While a majority of Amazon Prime Now Products are first-party, the company does offer thirdparty partnerships to companies such as wine sellers who can store their inventory in the Prime Now hub. Figure 17: Prime Now Source: Amazon Deutsche Bank Securities Inc. Page 19 19 June 2017 Internet Internet / Grocery Figure 18: Amazon Prime Now Grocery and Restaurant Offerings City Chicago Indianapolis Los Angeles New York City Portland San Diego San Jose Seattle Grocers / Local Stores Plum Market, Eataly & Eataly Vino, Merz, and My Fit Foods FreshThyme Sprouts and Bristol Farms Westside Market, Eataly, Gourmet Garage, Union Square Wine & Spirits, Vintage Grape Wine & Spirits, and Billy's Bakery New Seasons Market, World Foods, Uwajimaya, and Cupcake Jones Sprouts, Bristol Farms, Northgate Market, and Keg N Bottle Sprouts All the Best Pet Care, Bartell Drugs, PCC, and Uwajimaya City Atlanta Austin Baltimore Chicago Dallas Houston Los Angeles New York City Miami Orlando Portland San Diego San Francisco Seattle Tampa Restaurant Aviva by Kameel, Chai Pani, Flip Burger, Flying Biscuit, Grindhouse Killer Burgers, Varasano's Pizzeria, and many more Boteco ATX, Chi'Lantro, Clay Pit, Michi Ramen, Moonshine Patio Bar & Grill, Southside Flying Pizza, Sugar Mama's Bakeshop, Terry Black's Barbecue, The Backspace, and many more City Cafe,HomeSlyce, Indigma, Locust Point Steamers, Matsuri, Shiso Tavern, The Helmand, and many more Big Star, Dove's Luncheonette, Chicago Q, RPM Italian, RPM Steak, Balena, Big Bowl, Wildfire, Butcher & The Burger, M Burger, Beatrix, Tallboy Taco, Publican Quality Meats, and many more Blue Goose Cantina, Bryan Street Tavern, Ellen's Southern Kitchen and many more Beaver's, Dish Society, El Tiempo Cantina, Empire Caf, Happy Fatz, Hay Merchant, Luna Pizzeria, Piola - Midtown, Thai Gourmet, Carrabba's, Max's Wine Dive, P.F. Chang's and many more Umami Burger, Baby Blues BBQ, Wokcano, Hurry Curry of Tokyo, Feast from the East, John O'Groats, and many more Billy's Bakery, Pick a Bagel, S'MAC, Empanada Mama, Brother Jimmy's BBQ, Junior's Restaurant & Cheesecake, Le Pain Quotidien and many more Baires Grill, Brother Jimmy's BBQ, La Provence, Madero, Michael's Genuine Food & Drink, Morgans Restaurant, Spris, and many more Hawkers Asian Street Fare, Artisan's Table, Dexter's, Graffiti Junktion, Tamarind Indian Cuisine, Mamak Asian Street Food, PF Chang's and many more Pok Pok, Sizzle Pie, Waffle Window, Luc Lac, Habibi, East India Co. Bar and Grill, and many more T Deli, Tajima Ramen House, Carnitas Snack Shack, Alforon, Mama's Bakery & Deli, Rubicon Deli, and many more Big Chef Tom's Belly Burgers, DOSA, Les Clos, M.Y. China, The Monk's Kettle, Pressed Juicery, Rosamunde Sausage Grill, and many more Cactus, Wild Ginger, Skillet, Marination Station, Re Taco Bus, India's Grill, Renzo's Gourmet, Curry Leaves, Queen of Sheba, Byblos Caf, Datz, Piquant and many more Source: Deutsche Bank Valuation and Risks Amazon Our $1,150 PT is based on a consistent methodology using a SOTP of retail and AWS on 2018 estimates. The multiples are based on blended average of 18x EBITDA and 3.0% FCF yield for retail and 8x revenue multiple for AWS. Risks include higher competition, margin compression from higher fulfillment and shipping costs, and potential slowdown in retail business and AWS. Risks include higher competition, margin compression from higher fulfillment and shipping costs, and potential slowdown in retail business and AWS. Page 20 Deutsche Bank Securities Inc. 19 June 2017 Internet Internet / Grocery Figure 19: Amazon Valuation Analysis (as of June 16, 2017) Current Price Diluted Shares Outstanding Current Market Cap Less Cash and Other Assets Add Debt Adjusted Enterprise Value $987.71 490.0 $483,978 $21,531 $7,691 $470,138 Current multiples - Total AMZN Total Revenues Current EV/Rev Multiple Total EBITDA EV/EBITDA multiple FCF per share Current FCF yield 2010E $2.91 2012E $0.00 Retail EBITDA Target Multiple Enterprise Value Less Debt End Cash (ex AWS cash) Equity Value End Projected Share Count Implied Stock Price on Forward EBITDA 2504.0 3780.0 FCF Yield Retail FCF per Share (80% of total alloc) Target Yield Implied Stock Price on Forward FCF 2010E $5.50 2012E $3.91 2017E $165,662 2.8x $19,005 24.7x $30.96 3.1% 2018E 2019E $199,754 $239,401 2.4x 2.0x $23,856 $29,131 19.7x 16.1x $40.86 $46.11 4.1% 4.7% 2017E $8,590 18.0x $154,621 $7,691 $37,125 $184,055 489 $376 2018E 2019E $10,201 $12,190 18.0x 18.0x $183,103 $219,426 $7,691 $7,691 $57,376 $80,589 $232,788 $292,325 496 495 $470 $591 Retail Valuation Wtd Avg. Retail 2017E $24.77 3.0% $820 $598 Retail Val 2018E $32.69 3.0% $1,075 2019E $36.89 3.0% $1,221 $773 $906 $773 AWS Valuation Revenues Target Multiple Enterprise value Net cash for AWS AWS Equity value End Projected Share Count Implied AWS valuation on EV/Rev 18707.0 25.1x 34812.0 13.5x AWS value per share Total AMZN TP 2017E $16,946 8.0x $135,571 $3,000 $138,571 489.1 $283 2018E 2019E $23,184 $30,300 8.0x 8.0x $184,312 $242,398 $3,000 $3,000 $187,312 $245,398 495.6 494.6 $378 $496 $378 $1,150 Source: Deutsche Bank estimates and company reports Whole Foods Our $42 price target is based on Amazon's all-cash acquisition price. Downside risks include anything that blocks the acquisition by Amazon, or a sluggish macro growth in the US and/or increased market volatility, which could impact sentiment among Whole Foods' core educated, affluent consumers, potentially leading to slower comps. In addition, increased competition in the organicatural grocery space could put downward pressure on sales and margins over time. While Whole Foods has a big advantage as the best-known branded natural and organic grocer across the US, there are smaller competitors aiming to target its customers. At the same time, more Deutsche Bank Securities Inc. Page 21 19 June 2017 Internet Internet / Grocery traditional grocery competitors are making a greater commitment to natural and organic products in an effort to capture share in this rapidly growing market. Upside risks include a higher bid for the company, an acceleration in comps should the macro environment accelerate, WFM's ongoing price investments succeed in driving stronger-than-expected traffic and comps. Page 22 Deutsche Bank Securities Inc. 19 June 2017 Internet Internet / Grocery Appendix 1 Important Disclosures *Other information available upon request Disclosure checklist Company Ticker Recent price* Disclosure Amazon.com AMZN.OQ 987.71 (USD) 16 Jun 17 2,6,8,9,14,15 Whole Foods Market WFM.OQ 42.68 (USD) 16 Jun 17 2,6,9 Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 2. Deutsche Bank and/or its affiliate(s) makes a market in equity securities issued by this company. 6. Deutsche Bank and/or its affiliate(s) owns one percent or more of a class of common equity securities of this company calculated under computational methods required by US law. 8. Deutsche Bank and/or its affiliate(s) expects to receive, or intends to seek, compensation for investment banking services from this company in the next three months. 14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year. 15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services. Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes. 2. Deutsche Bank and/or its affiliate(s) makes a market in equity securities issued by this company. 6. Deutsche Bank and/or its affiliate(s) owns one percent or more of a class of common equity securities of this company calculated under computational methods required by US law. 9. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by India law. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Lloyd Walmsley/Shane Higgins Deutsche Bank Securities Inc. Page 23 19 June 2017 Internet Internet / Grocery Historical recommendations and target price: Amazon.com (AMZN.OQ) (as of 6/16/2017) 1,200.00 Previous Recommendations 1,000.00 13 12 10 9 800.00 Security Price 11 7 6 600.00 8 Current Recommendations 5 400.00 1 Buy Hold Sell Not Rated Suspended Rating 4 2 Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating 3 *New Recommendation Structure as of September 9,2002 200.00 0.00 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 **Analyst is no longer at Deutsche Bank Date 1. 07/25/2014: Rassouli** Buy, Target Price Change USD375.00 Shawn 8. 04/29/2016: Buy, Target Price Change USD900.00 Jay Samani** 2. 10/24/2014: Gupta** Buy, Target Price Change USD350.00 Himanshu-Z 9. 07/29/2016: Buy, Target Price Change USD985.00 Jay Samani** 3. 01/30/2015: Rassouli** Buy, Target Price Change USD410.00 Shawn 10. 10/28/2016: Buy, Target Price Change USD920.00 Jay Samani** 4. 04/24/2015: Rassouli** Buy, Target Price Change USD500.00 Shawn 11. 02/03/2017: Walmsley Buy, Target Price Change USD1,050.00 Lloyd 5. 07/24/2015: Mathivanan** Buy, Target Price Change USD665.00 Deepak 12. 04/26/2017: Walmsley Buy, Target Price Change USD1,125.00 Lloyd 6. 10/23/2015: Buy, Target Price Change USD725.00 Kevin LaBuz** 13. 04/28/2017: Walmsley Buy, Target Price Change USD1,150.00 Lloyd 7. 11/02/2015: Buy, Target Price Change USD800.00 Karl Keirstead Historical recommendations and target price: Whole Foods Market (WFM.OQ) (as of 6/16/2017) 70.00 60.00 Previous Recommendations 1 2 50.00 Security Price Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating 3 40.00 10 11 7 4 5 6 8 30.00 9 20.00 Page 24 Buy Hold Sell Not Rated Suspended Rating *New Recommendation Structure as of September 9,2002 10.00 0.00 Jun 14 Current Recommendations **Analyst is no longer at Deutsche Bank Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Date Jun 16 Sep 16 Dec 16 Mar 17 Deutsche Bank Securities Inc. 19 June 2017 Internet Internet / Grocery 1. 02/12/2015: Hold, Target Price Change USD54.00 Karen Short** 7. 07/28/2016: Hold, Target Price Change USD32.00 Shane Higgins 2. 05/07/2015: Hold, Target Price Change USD40.00 Karen Short** 8. 11/03/2016: Hold, Target Price Change USD29.00 Shane Higgins 3. 07/30/2015: Hold, Target Price Change USD35.00 Karen Short** 9. 02/09/2017: Hold, Target Price Change USD28.00 Shane Higgins 4. 11/03/2015: Hold, Target Price Change USD30.00 Karen Short** 10. 05/11/2017: Hold, Target Price Change USD38.00 Shane Higgins 5. 11/05/2015: Hold, Target Price Change USD26.00 Karen Short** 11. 06/16/2017: Hold, Target Price Change USD42.00 Lloyd Walmsley 6. 02/11/2016: Hold, Target Price Change USD28.00 Karen Short** Equity rating key Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Equity rating dispersion and banking relationships 500 450 400 350 300 250 200 150 100 50 0 51 % 46 % 55 % 47 % 3 % 28 % Buy Hold Companies Covered Sell Cos. w/ Banking Relationship North American Universe Newly issued research recommendations and target prices supersede previously published research. Deutsche Bank Securities Inc. Page 25 19 June 2017 Internet Internet / Grocery Additional Information The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable, Deutsche Bank makes no representation as to its accuracy or completeness. 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