Tuesday, December 10, 2013

Largest Food Distribution Deal in a Decade: Sysco to Buy US Foods for $3.5 Billion


Sysco Corp. (SYY:US) agreed to acquire closely held US Foods for $3.5 billion, adding brands from Cattleman’s meat to Devonshire desserts, in the largest food-distribution deal in eight years in North America. The shares jumped the most in 2 1/2 years.
Sysco will pay $3 billion in common stock, or about 13 percent of its shares, and $500 million in cash for US Foods to owners including KKR & Co. and Clayton, Dubilier & Rice LLC, according to a statement today. Bonds of US Foods soared.
The deal bolsters Sysco’s position as North America’s largest distributor of food to restaurants, expanding its geographical reach and creating supply chain cost savings. The combined business, with about $65 billion in annual sales, will be led by Sysco Chief Executive Officer Bill DeLaney.
“There will be cost savings opportunities for Sysco and they didn’t overpay, which the market is reacting favorably to,” Jack Russo, an analyst an Edward Jones & Co., said in an interview. The companies cater to the same customers, so this deal is about becoming as efficient as possible by “becoming one large company.”
Houston-based Sysco surged (SYY:US) 9.6 percent to $37.62 at the close in New York for the biggest gain since May 9, 2011. The shares were the most actively traded on the New York Stock Exchange, with volume of 71.7 million. Sysco has gained 19 percent this year, compared with a 27 percent gain for the Standard & Poor’s 500 Index.
Russo has a hold rating on the shares.

KKR, CD&R

KKR and CD&R acquired US Foods, based in Rosemont, Illinois, for $7.2 billion from Royal Ahold NV in 2007. The two firms, which own 98 percent of US Foods, will reap about a $1.25 billion, or 55 percent, partly realized gain on their combined $2.25 billion equity investment, according to two people familiar with the situation who requested anonymity because the matter is private.
Separately, KKR and CD&R will earn a profit on stakes they took on US Foods’ debt, one of the people said. As of Dec. 29, the two firms held $736 million in face value of the debt, according to a company filing. The bulk of that debt was refinanced this year. CD&R came away with a 160 percent profit on the $375 million it paid for its notes, this person said.
Representatives for New York-based CD&R and KKR both declined to comment.
With the assumption of US Foods’ debt, the deal is valued at about $8.2 billion. That represents a multiple of 9.9 times US Foods’ adjusted earnings before interest, depreciation and amortization, according to the statement.

Deal Multiple

In seven purchases of food distribution and food-services assets of more than $1 billion in the past decade, buyers paid a median of 10 times unadjusted Ebitda, data compiled by Bloomberg show. Sysco didn’t say how it adjusted US Foods’ Ebitda.
The acquisition is expected to be completed late next year, Sysco executives said on a conference call today. Sysco currently has about 18 percent of the U.S. market and the new combined business would have about a quarter of it, the executives said.
A representative of each of US Foods’ majority shareholders, affiliates of CD&R and New York-based KKR will join the board upon closing.
Today’s transaction is the largest in the food wholesale and distribution industry since Albertsons LLC was sold to several buyers for $16.1 billion in 2006, according to data compiled by Bloomberg. Sysco was the most acquisitive company in the industry in the past 10 years in North America, with 27 deals, the data also show.

Cost Savings

Sysco’s customers include Wendy’s Co. (WEN:US) The deal is expected to generate cost savings of at least $600 million after three to four years, coming from supply chain efficiencies and merchandising.
US Foods’ $1.3 billion of 8.5 percent notes due June 2019 climbed 3.25 cents to 109.625 cents on the dollar to yield 6.41 percent as of 4:20 p.m. in New York, according to data from Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Goldman, Sachs & Co. is serving as financial adviser to Sysco and Wachtell, Lipton, Rosen & Katz and Arnall, Golden & Gregory LLP are serving as its legal representation. Simpson Thacher & Bartlett LLP and Debevoise & Plimpton LLP are serving as US Foods’ legal advisers.
To contact the reporters on this story: Matt Townsend in New York at mtownsend9@bloomberg.net; David Carey in New York at dcarey13@bloomberg.net
To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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