June 5 (Bloomberg) -- U.S. antitrust regulators plan to file suit to block the proposed merger between Whole Foods Market Inc. and Wild Oats Markets Inc., the largest and second- largest natural-foods grocers.

Whole Foods, which agreed to buy Wild Oats for $565 million in February, said it will ``vigorously challenge'' the Federal Trade Commission in court and continue to pursue Wild Oats.

The agency is concerned that the combined company will control too much of the U.S. natural-foods market and increase prices. The FTC should instead consider the merger's effect on the overall supermarket industry as Safeway Inc., Wal-Mart Stores Inc. and other grocers expand their natural and organic departments, Whole Foods said today.

``If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality, and fewer choices for consumers,'' Jeffrey Schmidt, director of the FTC's Bureau of Competition, said in a statement. ``That is a deal consumers should not be required to swallow.''

The commission voted 5-to-0 to authorize staff to seek a temporary restraining order. The complaint will be filed by tomorrow in U.S. District Court for the District of Columbia.

Wild Oats, based in Boulder, Colorado, and Austin, Texas- based Whole Foods had earlier received two FTC requests for information about the proposed combination. Whole Foods had agreed to pay $18.50 a share for Wild Oats.

`Serious Issues'

``There are serious issues that this transaction raises,'' said Andrew Klevorn, a partner at Eimer Stahl Klevorn & Solberg LLP in Chicago who specializes in antitrust. ``It's the FTC going to the federal court and saying `We think this transaction poses such a threat that you ought to stop it now.'''

Shares of Whole Foods fell $1.21, or 2.9 percent, to $40.48 at 4:30 p.m. in Nasdaq Stock Market composite trading. Shares of Wild Oats rose 25 cents, or 1.5 percent, to $17.16.

Whole Foods may decide to walk away from the deal because of the length and cost it may take to complete it, Klevorn said. Even if Whole Foods wins in federal court, the FTC could still challenge it, a process that could take as long as five years.

``Even if you close the transaction, it always holds the risk of being undone by the FTC at a later date,'' Klevorn said.

Other grocery stores may be interested in buying Wild Oats should the merger with Whole Foods fall apart, Standard & Poor's analyst Joseph Agnese wrote in a note today. The FTC's move is a ``significant setback'' for chances of the merger going through, he said.

FTC and Retailers

The FTC hasn't blocked a retail merger on antitrust grounds in recent years, Klevorn said. In 1997, the FTC blocked 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.

Whole Foods and Wild Oats originally expected the purchase would be completed in April. It will probably take until the end of July for a court to rule on the planned FTC action, Whole Foods spokeswoman Kate Lowery said today.

Whole Foods, which has 195 stores in the U.S., Canada and 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.

Wild Oats was founded in 1987 with the purchase of Crystal Market, the only vegetarian natural-foods store in Boulder, and grew partly through the acquisition of small health-food stores. Revenue totaled $1.18 billion last year.

Whole Foods and Wild Oats ``serve a unique niche,'' Klevorn said. ``They are not like your run-of-the-mill, ordinary grocery store. At least that I'm sure is what the FTC is concluding.''

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

Last Updated: June 5, 2007 18:36 EDT