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 Sysco, whose shares jumped as much as 25 percent to a record high on
Monday, touted the combination of its supply chain expertise with
the strong consumer-facing technologies of US Foods as a key driver
for the deal, which creates a company with revenue of $65 billion.
"The purchase price seems fairly reasonable. It is less than 10
times trailing 12-month EBITDA, and there are synergies that are
expected to result from the deal," said Morningstar analyst Erin
Lash told Reuters.
United Natural Foods Inc <UNFI.O>, the next largest publicly listed
food distributor, trades at about 14 times trailing EBITDA.
Sysco, which will assume US Foods' debt of $4.7 billion, said it
expected about $600 million in annual cost savings within three to
four years.
Both companies distribute foods to restaurants, hotels, hospitals,
schools and other institutions.
Shareholders of US Foods, owned by affiliates of private equity
firms Clayton, Dubilier & Rice and KKR & Co <KKR.N>, will own about
13 percent of Sysco after the close of the deal, which is expected
in the third quarter of 2014.
KKR and Clayton, Dubilier & Rice are set to make more than 1.5 times
their original investment in US Foods, according to people familiar
with the matter who were not authorized to disclose such financial
details.
The private equity firms together invested about $2.25 billion as
equity in 2007 to buy US Foods — then called US Foodservice — from
Dutch grocer Ahold <AHLN.AS> for $7.1 billion including debt.
The final returns of the private equity firms will not be known
until they sell all of their Sysco shares.
"KKR had the investment marked at 1.3 times (its investment cost) as
of September 30, so once again we see a sale at a price above marked
value, indicating the general conservatism of KKR's marks,"
Oppenheimer analysts wrote in a research note.
Sysco Chief Executive Bill DeLaney, speaking on a conference call
with analysts, said Sysco now has an 18 percent share of the market,
while US Foods has 9 percent.
FTC TO SCRUTINIZE
DeLaney said the Federal Trade Commission (FTC), which rules on
antitrust matters, would certainly scrutinize the deal but he noted
that there were about 15,000 private companies involved in the U.S.
food distribution industry.
Three antitrust experts agreed that the deal would get a close look,
and that the FTC could order some asset sales.
Sysco, with annual revenue of about $44 billion, is the largest
operator in the U.S. food distribution business, with US Foods in
the No. 2 spot.
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The combined company will have 25 to 30 percent of the market, two
of the experts said.
The plan to close the deal in the third quarter indicated the
companies know they will have tough meetings with regulators, they
said.
"I think it's a problematic deal," said Robert Doyle, a veteran of
the FTC now at Doyle, Barlow and Mazard, an antitrust consultancy.
However, Herb Hovenkamp, who teaches antitrust at the University of
Iowa College of Law, agreed with Morningstar's Lash that the deal
was likely to go through, given the fragmented nature of the
industry.
Houston-based Sysco, which counts Wendy's Co <WEN.O> among its
largest customers, said the deal would add to earnings immediately
after closing.
DeLaney said Sysco was attracted by US Foods' customer-facing
technologies, such as standardized ordering software and mobile
apps. "We are particularly strong in the supply chain side of
things," DeLaney said.
Sysco uses the EFS Network which provides internet-based
supply-chain management products and services to foodservice
manufacturers, distributors and operators. The company had founded
the network along with McDonald's Corp <MCD.N>, Tyson Foods Inc <TSN.N>
and Cargill Inc <CARG.UL> in 2000.
Goldman Sachs & Co is financial adviser to Sysco, while Wachtell,
Lipton, Rosen & Katz and Arnall, Golden & Gregory LLP are legal
advisers.
Simpson Thacher & Bartlett LLP and Debevoise & Plimpton LLP are
legal advisers to US Foods, which did not identify a financial
adviser.
Sysco shares were up 11 percent at $38.04 in afternoon trading on
the New York Stock Exchange.
(Additional reporting by Maria Ajit
Thomas, Diane Bartz and Greg Roumeliotis; editing by Kirti Pandey
and Ted Kerr)
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