Analyst lays out 'strategic rational' for Amazon buying Wayfair

Following recent media speculation on the possibility of a combination, Loop Capital analyst Laura Champine told investors she sees "compelling strategic rationale" for Amazon (AMZN) to buy Wayfair (W), while she also believes the e-commerce giant would provide several benefits to Wayfair. SHOULD AMAZON BUY WAYFAIR?: Highlighting Amazon's interest in furniture and home furnishings and increasing willingness to make sizeable acquisitions, Loop Capital's Champine argued in a research note to investors that she sees "compelling strategic rationale" for the e-commerce giant to buy Wayfair, and believes Amazon would provide several benefits to the latter as well. Last year, Amazon began to make a push into the furniture and home furnishings business with the launch of private label brands Rivet and Stone & Beam, she noted, adding that the sector seems to be attractive to the e-commerce giant given its large and growing size and highly fragmented nature. Acquiring Wayfair may be unfeasible for other home furnishing retailers such as RH (RH) and Williams-Sonoma (WSM) given the likely significant earnings per share dilution and Wayfair's larger market cap, but the analyst believes that is not the case with Amazon. Champine estimates acquiring Wayfair at a significant premium to current stock price levels would be EPS dilutive to Amazon, but not enough to dissuade management given its long-term focus. Wayfair would provide Amazon with immediate scale in the furniture and home furnishings business, "dramatically" expand Amazon's merchandise assortment and supplier relationships, provide merchandising and marketing "best practices" for its core website, and provide large cube delivery distribution expertise, she contended. Meanwhile, the analyst pointed out that Amazon would increase Wayfair's purchasing power, provide entry into several attractive foreign markets, offer best-in-class e-commerce technology, and provide cross-marketing opportunities. Champine reiterated a Buy rating on Wayfair shares, saying the possibility of such deal further supports her bullish thesis. PRICE ACTION: In morning trading, shares of Wayfair are fractionally higher at $84.79, while Amazon is up about 0.5% to $1,551.89.

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