Update: Webvan to Buy HomeGrocer.com in Stock Deal

Updated from 8:36 a.m. EDT

Two Internet grocery stores linked up Monday, as Webvan (WBVN Quote) agreed to buy HomeGrocer.com (HOMG Quote) in an all-stock deal valued at about $1.2 billion.

Investors gave a thumbs down to the deal, driving shares in both companies down. Webvan shares settled down 1 7/16, or 17%, at 7 5/16, while HomeGrocer.com ended down 1 1/8, or 14%, at 6 7/8.

The merger unites two of the leading online retailers that have personalized delivery capabilities. Both offer home delivery of grocery items and other consumer products in select markets in the U.S. The combined company will be called Webvan Group.

The union scared off investors, however, as the near-term prospects are fraught with uncertainties, according to Lauren Levitan, an analyst at Robertson Stephens in San Francisco. While long-term prospects for the merger are good, in the near term the new company faces a host of hurdles, she said. First, the two companies have overlapping market expansion plans that must be rectified. Secondly, the companies use different technology platforms. And lastly, the pair have vastly different logistics philosophies, with Webvan preferring large distribution centers and a 30-minute delivery time, while HomeGrocer.com uses smaller centers and delivers within 90 minutes.

Still, long term the companies are well positioned to create a national brand, she said. And in general terms, she praised the deal as a benchmark for the expected consolidation of the Internet retail industry.

"My perception is that this is the first real meaningful consolidation we've seen in the online shopping space," said Levitan, who has a buy rating for Webvan but does not rate HomeGrocer. Her firm has performed underwriting for Webvan but not HomeGrocer.

The combination is expected to extend Foster City, Calif.-based Webvan's market reach to a total of 13 U.S. metropolitan areas by the end of 2000. Webvan and HomeGrocer, based in Kirkland, Wash., currently operate in nine major metro areas. By the end of the year, as a result of the merger, Webvan expects to serve markets in Atlanta; Baltimore; Bergen County, N.J.; Chicago; Dallas; Los Angeles; Orange County, Calif.; Portland, Ore.; Sacramento; San Diego; San Francisco; Seattle and Washington, D.C.

Under the terms of the agreement, HomeGrocer.com stockholders will receive 1.07605 shares of Webvan common stock in exchange for each HomeGrocer.com share held. Based on Friday's closing prices for both stocks, this arrangement represents a 16% premium for HomeGrocer.com shareholders.

The companies expect the deal to close in the third quarter or early fourth quarter of 2000.