Activist hedge fund Jana Partners has amassed an 8% stake in Whole Foods Market (WFM) and is urging them to work harder harnessing strategies to maximize operational efficiencies and also test the waters in terms of possible takeover interest. I have been a fan of the company for a long time, and of the stock ever since it cratered into the 30’s several years back. The original investment thesis hinged on long-term square footage growth (8-10% annually) but the company has now decided to slow new location development. As a result, we are now left with more of a cash cow business with minimal growth (same store sales have been falling 2-3% for over a year).

The stock recently traded in the high 20’s (too low for even a slower growth outlook) and Jana seems to have timed their purchases very well during February, March, and April at prices of between $28 and $32 each. Even without a buyout I believe WFM stock would be fairly valued in the low 40’s (far lower than I would have said when they had a stated objective of reaching 1,200 stores (versus less than 500 today). Wall Street does not agree, as even with the Jana-related bump the stock fetches $34 per share.

The easiest way for WFM to realize a more fair price would be to find a buyer, but the company would be a big target ($11 billion market value at current prices). As a shareholder, I would not be thrilled with anything less than a $13.5 billion acquisition price. But who would acquire WFM?

The press reports that Amazon contemplated an offer last year seems odd. They simply prefer to build businesses internally. With no track record of large M&A deals, the odds that Jeff Bezos would all of the sudden offer eleven figures for WFM seems remote.

The second possibility would be a strategic buyer, as in one of WFM’s grocery store competitors such as Kroger or Albertson’s. One could make the argument either way on this line of thinking. The traditional stores have been successful recently copying the WFM product offering, which has resulted in negative comps for the organic pioneer, so they really don’t need to buy WFM. On the other hand, one less competitor means less pricing pressure industry-wide, which could be attractive in such a cut throat market like grocery retailing. I could understand both sides of the coin very easily.

The last option in my view would be a Private Equity buyer. This makes the most sense from a financial point of view, as PE could use debt to fund much of the acquisition cost without endangering the company (WFM’s balance sheet is pristine). Other grocery store chains have far more leverage which limits their ability to borrow more money. I suspect banks would allow a near-term leverage ratio of up to 5x for a Whole Foods leveraged buyout, which would equate to roughly $6 billion of debt financing and $7 billion of equity capital (assuming a purchase price of $13 billion).

The biggest hurdle for private equity is that $7 billion equity requirement. That is a very large deal for one company to take on alone. More likely a consortium of PE firms could get together and pitch in $2-3 billion each. I have no doubt that many firms are taking a look at this type of option.

All in all, a buyout of WFM is possible, but not probable, in my view. The price tag would be high in absolute terms and there is enough concern about the company’s competitive position that pulling the trigger on a deal might be tough for most of the parties that do in fact kick the tires. If I were setting the odds, I would say there is a 60% chance WFM stays public, a 25% chance private equity makes a play, a 15% chance another chain bulks up its store base, and a

Full Disclosure: Long shares of Whole Foods Market and Amazon at the time of writing, but positions may change at any time