Whole Foods: Can it win back the trust?

NEW YORK (CNNMoney.com) -- Is the Whole Foods-Wild Oats merger dead or does the deal still have the faintest hope of a heartbeat?

It depends.

Richard Pierce, law professor and antitrust expert at George Washington University School of Law, isn't too optimistic. "This deal is toast especially after the Mackey stuff came out," Pierce said, referring to comments Whole Foods CEO John Mackey made about pricing and how the merger would strengthen the company's position as an industry leader.

"If John Mackey backtracks on what he said in his memo to the board, that's like him saying 'Hi, I am a total liar'."

Citing antitrust concerns, the Federal Trade Commission (FTC) recently moved to block Whole Foods' $565 million deal to buy rival Wild Oats. "If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality, and fewer choices for consumers," the regulatory agency said in a statement. For its part, Whole Foods (Charts, Fortune 500) challenged the FTC lawsuit.

Wild Oats (Charts) is the No. 3 seller of natural foods after Whole Foods and Trader Joe's. Whole Foods operates nearly 200 stores in 31 states while Wild Oats has about 110 stores in 24 states. Closely held Trader Joe's operates 150 stores in 20 states.

This week, the FTC revealed in unsealed court filings statements Mackey e-mailed to the Whole Foods board in which he said acquiring its main rival would prevent other retailers like Wal-Mart (Charts, Fortune 500) and Kroger (Charts, Fortune 500) from buying Wild Oats and boosting their share of the natural food market.

"Our targeted company is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space. Eliminating them means eliminating this threat forever, or almost forever," Mackey wrote in the memo, which Whole Foods subsequently posted on its Web site.

What's more, Mackey wrote, "By buying [Wild Oats] we will ... avoid nasty price wars in Portland [both Oregon and Maine], Boulder, Nashville, and several other cities which will harm [Whole Foods'] gross margins and profitability."

"I can't believe that [Mackey] said this. Whole Foods shareholders probably can't believe he said this. By putting it in writing, that certainly compounds his stupidity," Pierce said. "Any lawyer with a triple-digit IQ will say that if this is what you believe, keep it to yourself. Don't express it to anyone, not even orally. It will kill the deal," he said.

"I suppose the lesson is that a CEO should never propose something that is illegal. It's wrong and there's a high likelihood it will be detected," Pierce added.

Yet other experts say Whole Foods might still be able to placate regulators despite its CEO's gaffe.

"There's a pre-injunction hearing at the end of July. This is the definitive event in the legal process," said Jeff Witham, an antitrust lawyer at Dewey Ballantine who specializes in mergers and private equity litigation. "If the FTC obtains an injunction, then the deal is in serious trouble."

The FTC filed a lawsuit and won a temporary order against Whole Foods to block the merger until a hearing, set for July 31. If the judge grants an injunction, the that would effectively kill the deal, Witham said. Otherwise the case would proceed to trial a year or two later.

"I suspect negotiations are still ongoing between the company and the FTC staff," he added, alluding to Whole Foods' announcement Wednesday that it would sell the 35 Henry's and Sun Harvest stores as well as a distribution center it would gain from the deal with Wild Oats.

Whole Foods and the FTC could not immediately be reached for comment.

Even Pierce conceded the FTC might back off if Whole Foods indicates it will spin off enough of Wild Oats' assets to mitigate antitrust concerns.

While Witham agrees that "critical errors" were made, he believes the Whole Food-Wild Oats deal ultimately "isn't about the intent of the management" but whether economics supports the FTC arguments against the deal.

"At theory is the question of whether the combined company would give it enough market share to raise prices to an anti-competitive level," Witham said."There are a substantial number of other players, including Wal-Mart and other grocery chains, that also sell natural and organic foods. So the fact that there are many other companies selling the same type of products will restrain Whole Foods ability to increase prices."

"I would be interested to see the FTC's data because it seems far-fetched to suggest that there is a single distinct market for organic food that this deal would be anti-competitive for," Witham said.