Aug. 16 (Bloomberg) -- Whole Foods Market Inc.'s $565 million purchase of Wild Oats Markets Inc. doesn't violate antitrust laws and can proceed, a federal judge ruled, allowing the two largest U.S. natural foods grocers to combine.

U.S. District Judge Paul L. Friedman declined to grant the U.S. Federal Trade Commission's request for a preliminary injunction to bar the transaction today.

Whole Foods agreed to acquire Wild Oats in February. The FTC sued in June, claiming consumers would be harmed by higher prices and decreased competition. The grocer will now own its largest competitor as it seeks to lure customers from conventional rivals such as Safeway Inc. and Wegman's that are selling more natural foods.

``They took a practical view of how consumers shop,'' said Andrew Klevorn, a partner at Eimer Stahl Klevorn & Solberg in Chicago. ``Consumers look at Whole Foods as just one of many choices in the grocery segment.''

FTC Competition Director Jeffrey Schmidt called Friedman's decision a ``loss'' for consumers and competition. He said in a statement that the agency is reviewing its options.

``The District Court's ruling affirms our belief that a merger between Whole Foods and Wild Oats is a winning scenario for all stakeholders,'' Chief Executive Officer John Mackey said in a statement.

Shares Jump

Whole Foods, based in Austin, Texas, jumped $3.33, or 8.1 percent, to $44.50 at 7:05 p.m. New York time in late U.S. trading. It declined 33 cents to $41.17 in Nasdaq Stock Market composite trading before the announcement.

Wild Oats, based in Boulder, Colorado, rose $2.87, or 19 percent, to $18.08. It fell to as low as $13.25 earlier today.

Whole Foods, which has 197 stores in the U.S., Canada and the U.K., would add 110 locations in 24 states and Canada by buying Wild Oats. Whole Foods was founded in 1980 and had sales of $5.6 billion last year.

The FTC hasn't successfully blocked a retail merger on antitrust grounds in recent years, lawyers said. In 1997, the FTC stopped Staples Inc.'s attempt to buy competitor Office Depot Inc. for $4 billion, saying it would harm competition in the growing market for office supplies.

``Most antitrust lawyers and everybody in the food industry thought that the case was very weak because of the artificially narrow market definition,'' Clifford Aronson, a Skadden, Arps, Slate, Meagher & Flom lawyer who represents Wild Oats, said in an interview.

Whole Foods and FTC attorneys completed their arguments Aug. 1 in a two-day non-jury trial.

``Radically Different'

``These are radically different enterprises from conventional supermarkets,'' FTC attorney Michael Bloom said during the government's closing argument. ``Consumers are unequivocally better off when competition is vigorous and aggressive.''

Paul Denis, a Dechert lawyer representing Whole Foods, contended that the typical Whole Foods customer also shops at conventional stores and that customers who just seek organic items make up a small minority of the chain's shoppers.

As part of its suit, the FTC revealed that Mackey made anonymous postings on Yahoo! Inc.'s financial message boards promoting his company from 1999 to 2006 using the name ``rahodeb.''

The U.S. Securities and Exchange Commission is investigating Mackey, and the company's board is internally reviewing his actions.

Vocal Opposition

Mackey has been vocal about his opposition to the FTC's challenge since the suit was filed, posting a 14,000-word response to the suit on his blog.

He told the board that the purchase would allow the company to avoid ``nasty price wars'' in several markets that would harm its margins, according to the FTC suit.

Wild Oats ``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,'' Mackey told directors, according to the suit. ``Eliminating them means eliminating this threat forever, or almost forever.''

``Even with all that documentary evidence that suggested Whole Foods viewed Wild Oats as its main competitor and wanted to eliminate it, the government still didn't win its case,'' said Charles Rule, head of the antitrust practice at Cadwalader, Wickersham & Taft LLP in Washington.

Whole Foods said it and Wild Oats agreed with the FTC not to close the purchase before Aug. 20 at noon Washington time.

Seeking Delays

The FTC may try to delay the transaction while it appeals today's decision, said Rule, a former head of the U.S. Justice Department's antitrust division.

Aronson said the agency will probably seek a delay.

Whole Foods has agreed to sell 35 of the Wild Oats stores to Apollo Management LP, pending successful completion of the acquisition. The grocer is selling its stores that carry the Henry's Farmers Market and Sun Harvest banners.

The case is Federal Trade Commission v. Whole Foods Market Inc., 07-1021, U.S. District Court, District of Columbia (Washington).

To contact the reporter on this story: Josh Fineman in New York at jfineman@bloomberg.net

Last Updated: August 16, 2007 21:06 EDT