WebVan buys HomeGrocer: walking wounded

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From: Rohit Khare (Rohit@KnowNow.com)
Date: Tue Jun 27 2000 - 04:28:23 PDT

[somehow, last-mile Internet delivery sounds like it ought to be a
more open infrastructure, but fundamentally, Americans like to drive

June 27, 2000
Webvan to Acquire HomeGrocer in $1.2 Billion Deal


SAN FRANCISCO, June 26 -- The much-anticipated consolidation of the
online grocery market got under way today with the announcement that
the Webvan Group Inc. would acquire HomeGrocer.com Inc. in a stock
swap valued at approximately $1.2 billion, based on Friday's closing
price of $8.72 a share for Webvan stock.

But while analysts praised the deal as one that would help cement
Webvan's market leadership, investors focused on the uncertainties of
melding two disparate business models and technology bases, sending
shares in both companies down. Shares of Webvan fell $1.40, to
$7.3125, while HomeGrocer fell $1.21, to $6.875.

Web grocers have been among the hardest hit since investors began to
flee e-commerce stocks late last year, raising questions about the
companies' abilities to raise the capital needed for expansion.
Shares in Webvan, which went public in November 1999, have traded as
high as $34 but are now well below the original public offering price
of $15. HomeGrocer went public in June at $12 but now trades below
that price.. Amazon.com owns about 22 percent of HomeGrocer.

"The deal lets these two companies come together and be the leader,"
said Lauren Levitan, an analyst with Robertson Stephens. "Instead of
competing with each other, they can focus their attention on the real
challenger in the space, which is the traditional grocery business.

But it will take some time to see if the executional complexity of
this is paying off. Just because it's strategically appropriate,
doesn't mean it will work."

Webvan, which is based in Foster City, Calif., will exchange 1.07605
of its shares for each HomeGrocer.com share. Approximately 138
million shares of Webvan stock will be exchanged for the outstanding
shares of HomeGrocer.com, which is based in Kirkland, Wash.

Webvan and HomeGrocer both offer home delivery of groceries and other
consumer items in key metropolitan markets across the United States.
But both have repeatedly stressed that they are not in the
notoriously low-profit-margin grocery business, but are instead
last-mile internet retailers, competing as much with U.P.S. for rapid
package delivery as they do with Safeway for food sales. Last-mile
retailers operate their own fleets of trucks, unlike Amazon.com,
which relies on the U.S. Postal Service and other carriers.

"Webvan's combination with HomeGrocer harnesses the energy and
resources of both organizations and creates an even more attractive
shopping proposition for consumers -- one that will draw them out of
traditional stores and into our Internet marketplace," George T.
Shaheen, Webvan's president and chief executive, said in a statement.
"With this merger, we are moving early and aggressively to
consolidate two successful companies to build a strong last-mile
Internet retailer."

The company still faces several major competitors in the online
grocery field, like Peapod Inc., Netgrocer and Streamline.

Frustrated in its attempts to raise equity financing in the public
markets, Peapod, the first online grocery, sold a 51 percent stake in
April to Royal Ahold, the Dutch food provider, for $73 million, or
$3.75 a share.

Webvan said it expected the combined companies market to reach from 9
major metropolitan areas currently to a total of 13 metropolitan
areas by the end of 2000.

By the end of the year, as a result of the merger, Webvan said it
expects to serve metropolitan areas in Atlanta; Baltimore; Bergen
County, N.J.; Chicago; Dallas; Los Angeles;, Orange County, Calif.;
Portland, Ore.; Sacramento; San Diego; San Francisco; Seattle and
Washington. Peapod operates in nine U.S. markets.

Ms. Levitan said the acquisition should help Webvan continue its
expansion without tapping the capital markets so frequently. "This is
a very capital-intensive business, there's no getting around that,"
she said. "That said, combining these two companies should reduce
that, because they won't be raising capital just to compete with each

Upon completion of the acquisition, Webvan's founder, Louis H.
Borders, also a co-founder of Borders Books, will remain chairman of
Webvan and Mr. Shaheen will be president and chief executive of the
combined company.

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