Thread: Sysco Buys Rival US Foods for $3.5 Billion to Create Food-Distribution Giant

Sysco Buys Rival US Foods for $3.5 Billion to Create Food-Distribution Giant

Deal by Food-Service Providers Would Give US Foods Holders About 13% of Sysco

By ANNIE GASPARRO,
RYAN DEZEMBER and
SARAH E. NEEDLEMAN

Updated Dec. 9, 2013 1:52 p.m. ET

Sysco Corp. SYY +10.17% said it will buy US Foods for $3.5 billion in stock and cash, uniting the country's two biggest food-distribution companies into a giant with about $65 billion in annual revenue.



The combined company would have increased leverage selling and distributing food goods from manufacturers to restaurants, hospitals, hotels, schools and other institutions. That middleman role already makes the companies important players in the service economy: Sysco alone has about 425,000 customers.

Sysco and US Foods together collected about 27% of the revenue in the U.S. food distribution market last year, according to research firm Technomic Inc. The next biggest competitor is Performance Food Group Co. of Richmond, Va., which Technomic says has only 5% market share. Sysco said it expects the market share to be about 25%, compared with 18% now for Sysco alone, because it will likely lose some customers in the merger process.

Sysco Chief Executive Bill Delaney said the deal will provide the new Sysco with increased purchasing power, enhanced innovation ability and cost savings. He acknowledged that the company might need to sell parts of its business to satisfy antitrust regulators, though it has no such plans yet.
The antitrust discussions "will be a review process and it will take several months, and there could very well be some divestitures," he said on a conference call. "But even with some divestitures, this is still a very good deal."
The planned merger raised concerns for some customers. John Graf, chief executive of Priory Hotel in in Pittsburgh, said he worries that it will limit his choices. His 48-room hotel used US Foods as its main supplier because it's a "one-stop shop" that provides discounts for bulk orders. The hotel spends about $9,000 a month at US Foods, buying items including cereals, cheeses and meats it serves to guests for continental breakfasts as well as napkins, paper towels and other paper products.



A driver for Sysco unloads supplies for a restaurant in Cleveland Tuesday. Associated Press

With the merger, his hotel would lose the ability to switch its business to Sysco if it became unhappy with US Foods. The 70-employee hotel would need to rely on multiple smaller vendors, which Mr. Graf said would create logistics headaches and increase costs. Beyond Sysco and US Foods, "there's really no other supplier that has the broad range of products," he said.
Sysco's Mr. Delaney said the industry will remain competitive. "It is a very dynamic market," he said. "There are 15,000 to 16,000 distributors out there, and more nontraditional competitors."
Investors cheered the deal, sending Sysco's shares up sharply in early trading Monday morning. The shares, listed on the New York Stock Exchange, had gained only about 8.4% this year as of Friday's close as Sysco has struggled with high food prices and weakness in the restaurant industry. Sysco's profit in the fiscal year ended June 29 fell 12% to $992.4 million from $1.12 billion.
The deal has been approved by the boards of both Houston-based Sysco and US Foods, of Rosemont, Ill., the companies said in a statement. In addition to paying about $3 billion in stock and $500 million in cash, Sysco will assume or refinance US Foods debt of about $4.7 billion, they said. The companies expect the deal to close in the 2014 third quarter.
US Foods main shareholders—private firms Clayton, Dubilier & Rice LLC and Kohlberg Kravis Roberts KKR +2.80% & Co.—will join Sysco's board. KKR and Clayton Dubilier bought US Foods in 2007 in a deal valued at $7.2 billion.
Sysco and US Foods said their combination is expected to generate "synergies" of at least $600 million after three-to-four years, in part from supply-chain efficiencies and reducing administrative overlap.
Sysco considered buying US Foods almost seven years ago but didn't. Mr. Delaney said the change of heart comes now that US Foods is more focused on innovation and improving efficiency.
He said US Foods has technology related to customer ordering and a mobile application that Sysco is interested in.
Restaurants and other customers tend to want more than one supplier, and Mr. Delaney acknowledged that the merger could cause customers that use both Sysco and US Foods to go elsewhere for some of their products.
"In our model, we have factored in that risk," Mr. Delaney said. "We have been a little more conservative on our sales growth for the first couple years…but we are going to do everything we can to minimize customer flight."
Founded in 1969, Sysco has grown to have $44.4 billion in revenue last year and 48,100 employees world-wide. About 60% of its customers are restaurants.
When they bought US Foods, KKR and CD&R each paid $1.13 billion in cash, covering the remainder with nearly $5 billion of debt.
US Foods has struggled with its big debt load, and it spent the past year refinancing some of that debt to lock in lower interest rates.
Since most of the deal is being paid in stock, the buyout firms won't immediately recoup their cash. But the agreement would bring liquidity to their investment at what, based on Sysco's recent stock price, is a modest buyout profit.
At Sysco's closing price Friday, the buyout firms would get a return of about 1½ times their cash investment. A higher share price—Sysco's stock was up more than 10% in midday trading Monday—would benefit the private-equity firms as they sell their stakes.
A return of 1½ times its invested cash puts the deal in line with other buyouts of its era, according to data from Cambridge Associates LLC Private Investments Database. A return between one and two times cost was the most likely result of buyouts struck between 2007 and 2009, occurring in about 30% of the 376 deals that had been fully exited by late March, according to the Cambridge data.
If the deal closes as expected in the 2014 third quarter, the buyout firms will need to hold their Sysco stock for a certain amount of time after that before they can sell, per a so-called "lock-up period," according to people familiar with the matter.
The deal return is also sweetened by millions of dollars in fees that the firms have collected from US Foods during their ownership. The company, for example, pays the firms a monthly management fee of $800,000, according to securities filings.
KKR and CD&R have also taken fees for helping to arrange financial transactions, such as the recent debt refinancing, filings show.
The Sysco deal is the latest example of private-equity firms exiting investments made during the buyout boom that preceded the financial crisis. The financiers have been aided by a buoyant stock market hungry for new shares, which has encouraged initial public offerings, as well as by cheap credit, which has allowed private-equity-owned companies to refinance debt they took on to finance buyouts and to add new debt to pay dividends to their owners.

http://online.wsj.com/news/articles/...47881181477164

That is just great....aren't we all excited!!!!

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