Amazon is open to doing business with third-party suppliers, but there is a catch. The Wall Street Journal report shows that Amazon demands 30% of the supplier's company at a fixed rate, which is usually below the market valuation.
Amazon's Grip on Suppliers
Amazon has added these kinds of stipulations to contracts with companies that supply it with call center services, aircraft, and Amazon Fresh groceries.
According to The Wall Street Journal, the companies must have supplied Amazon more than 75 times over the last ten years before they can be an official Amazon supplier.
According to Amazon's quarterly financial filings, the potential equity in other firms is valued at almost $3 billion.
The deal that Amazon is offering is called a warrant, and they work the same way as the stock options given to employees of a company.
Amazon gets the option to purchase its supplier's stock at a certain price on the market and set it before the deal is announced. When the stock increases, Amazon can hold the warrant over the long-term or sell it off to make a profit.
A lot of these deals are contingent on Amazon giving its suppliers a certain amount of business within a set time limit, according to ArsTechnica.
Bloomberg's Matt Levine argued that the deals could be considered good for both Amazon and the supplier.
Levine refers to one of the deals discussed in The Wall Street Journal article, where Amazon secured warrants for 15% of SpartanNash, a grocery supplier.
Levine noted that SpartanNash's stock increased 26.3% the day that the Amazon deal was announced, while Amazon only would be able to get 15% of the equity market value.
Another supplier, Clean Energy Fuels Corp., which sells natural gas sourced from landfills and other biogenic sources, signed a contract with Amazon that allowed the e-commerce giant to purchase up to 20% of Clean Energy Fuels Corp. over the next ten years.
Executives at the gas supplier reportedly hope that the warrants and shareholding will keep Amazon from buying from other suppliers.
Despite the positive outlook on the deals, Amazon reportedly pressured companies into agreeing to unheard-of terms, relying on its enormous buying capacity and clout among investors.
Former Amazon executives told The Wall Street Journal that companies offered deals including warrants could not refuse that part of the contract that demands 30% of their shares.
Amazon Pressures Companies
Not all companies are willing to meet Amazon's terms. Air Transport Services Group, or ATSG, negotiated a deal to lease 20 Boeing 767s to Amazon for its delivery network.
Amazon wanted warrants as part of the deal, but ATSG executives were not happy with the idea. Amazon did intense and protracted negotiations to make them fold.
ATSG ended up agreeing to the terms in 2016, and in May, Amazon used its warrants and purchased 19.5% of ATSG's stock.
Amazon also has contracts with Cargojet and Atlas Air that include warrants, and it has a similar arrangement with Startek, a call center company.
According to The Wall Street Journal, during the Atlas Air negotiations, Amazon received warrants for up to 30% of the company as the e-commerce giant insistent that if the terms were not met, there wouldn't be a deal.
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Written by Sophie Webster
