Big Organic just got lots bigger.

Bloomberg reports:

Feb. 22 — Whole Foods Market Inc., the largest U.S. natural-foods grocer, plans to buy rival Wild Oats Markets Inc. for $565 million after first-quarter profit declined for the first time in five quarters.

Whole Foods will pay $18.50 cash for each share of Boulder, Colorado-based Wild Oats, 18 percent higher than its closing price yesterday. Net income fell 7.8 percent to $53.8 million, or 38 cents a share, Austin, Texas-based Whole Foods said.Whole Foods shares fell for the first time since 1999 last year as competition from Wal-Mart Stores Inc. and Safeway Inc. cut into sales growth. The acquisition may help Whole Foods lower costs while spurring growth at new stores, Chief Executive Officer John Mackey said yesterday.

“Investors have built in heady expectations for Whole Foods’ growth, and this is going to jump start that,” said David Dietze, president and chief investment strategist at Summit, New Jersey-based Point View Financial Services.

Wild Oats posted a loss in two of the past five years and its sales climbed 26 percent to $1.12 billion. At the same time, Whole Foods doubled profit and sales.

“Certainly the merger will allow us to compete even better against those players,” Chief Financial Officer Glenda Chamberlain said in an interview today. “It’s actually much more of a positive move for us than it is a defensive move, simply because we believe there are so many synergies to be gained by the combination.”

Biggest Acquisition

Whole Foods said the purchase, its largest, will be funded with $700 million in loans. The company, which agreed to begin buying Wild Oats’ outstanding shares on Feb. 27, anticipates the transaction will close in April.

“Wild Oats has improved their stores quite a bit in last few years, and we think we can help them improve even more,” Mackey said on a conference call with analysts and investors yesterday. “We can put jet propulsion under a lot of those stores in the next year or two.”

Shares of Whole Foods rose $3.42, or 7.5 percent, to $49.12 at 8:38 a.m. New York time before the start of Nasdaq Stock Market composite trading. Wild Oats shares jumped $2.64, or 17 percent, to $18.36.

Whole Foods will add 110 stores in 24 states and Canada’s westernmost province of British Columbia. All of Whole Foods’ 11 operating regions will add stores, with three — the Pacific Northwest, Rocky Mountain and Florida regions — gaining “critical mass,” the company said in a statement.

Shutting Stores

Some Wild Oats stores will be closed, and others that overlap with Whole Foods stores in development probably will be relocated, Whole Foods said. Mackey declined to say how many stores will be closed.

“Wild Oats has been waiting to sell to somebody for three or four years,” said Matt Patsky, portfolio manager at Boston- based Winslow Management Co. which oversees $350 million, including Whole Foods shares.

The departure of former Wild Oats Chief Executive Officer Perry Odak in October and the subsequent resignation of the company’s chief financial officer created a buying opportunity, Mackey said on the call.

“The timing was right because of this strategic gap at Wild Oats,” Mackey said. “We thought it would be a good time to approach, and it was.”

Whole Foods will cut significant costs from duplications in overhead with the purchase, Mackey said yesterday on the call with investors.

Improvements Seen

“We think we will be able to improve the operations of the Wild Oats stores significantly,” Mackey said. The company first considered buying Wild Oats six years ago, he said. Mackey said he initiated the latest discussions with a call to Wild Oats’ interim CEO Gregory Mays.

Net income in last year’s first quarter was $58.3 million, or 40 cents a share. Earnings this year missed the 41-cent average estimate of 14 analysts surveyed by Bloomberg. Sales in the first quarter increased 12 percent to $1.87 billion, lagging behind the $1.89 billion average estimate of 10 analysts.

The company’s biggest purchase previously was in 1996 when it bought Fresh Fields, at the time the second-largest U.S. natural foods chain with 22 stores. The company has made 18 acquisitions.

It will take about two years to integrate the Wild Oats stores, Mackey said.

“A year from now we will definitely be seeing very good progress,” Mackey said. “It might take fully two years before you really see all the synergies begin to play out.”

Wild Oats was founded in 1987 with the purchase of Crystal Market, the only vegetarian natural foods store in Boulder, and grew partly through the acquisition of small health food stores.

Trailing Competitors

Shares of Whole Foods tumbled 39 percent last year, compared with a 22 percent gain for Kroger Co., the biggest U.S. grocery chain, and a 46 percent increase for Safeway, the third largest.

RBC Capital Markets served as Whole Foods’ financial adviser and as the dealer manager for the offer to buy stock. RBC and JPMorgan Chase & Co. are co-leading the debt financing. Whole Foods wants to increase its long-term credit line to $250 million, for which JPMorgan will assist with finding an amendment. Citigroup Inc. is Wild Oats’ financial adviser.