HOUSTON - Sysco has reached an agreement to buy one of its key rivals, creating an even larger, global distribution company.
Sysco is buying privately held US Foods for about $3.5 billion in cash and stock. When the deal closes, Sysco expects the addition of US Foods to increase its annual sales by about 46 percent to about $65 billion. The deal bolsters Sysco’s position as North America’s largest distributor of food to restaurants, expanding its geographic reach and creating cost savings.
Sysco shares jumped as much as 26 percent Monday, setting an all-time high.
Houston-based Sysco will pay $3 billion in common stock and $500 million in cash. It will also assume or refinance about $4.7 billion in debt. That puts the total value of the deal at about $8.2 billion.
Sysco President and Chief Executive Officer Bill DeLaney said the two companies have complementary core strengths that include large product portfolios.
For the fiscal year that ended in June, Sysco’s sales totaled $44.41 billion. The company distributes food and cooking supplies to about 425,000 customers through 193 locations in the U.S., Bahamas, Canada, Ireland and Northern Ireland.
US Foods’ customers include independent and chain restaurants, health-care and hospitality companies, and government and educational institutions. Stakeholders in the company, based just outside Chicago in Rosemont, Ill., include Clayton, Dubilier & Rice LLC and Kohlberg Kravis Roberts & Co. LP.
Representatives from both of those investment firms will join Sysco’s board.
When the deal closes, US Foods shareholders will own about 87 million shares, or about 13 percent, of Sysco’s common stock.
The buyout has been approved by the boards of both companies. Sysco said it expects the deal, which is to close in the third calendar quarter of 2014, to immediately increase its profit after adjusting for acquisition-related costs and expenses. It’s also expected to create annual cost savings of at least $600 million after three or four years.
“There will be cost-savings opportunities for Sysco and they didn’t overpay, which the market is reacting favorably to,” said Jack Russo, an analyst at Edward Jones & Co. The companies cater to the same customers, so the deal is about becoming as efficient as possible by “becoming one large big company,” he said.
Moody’s Investors Service placed all of Sysco’s ratings,including its investment grade “A1” long-term rating, under review for possible downgrade. Moody’s said that though the deal makes sense and the price seems fair, a downgrade is likely given the amount of debt Sysco will assume.
The 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 has been the most acquisitive company in the industry in the past 10 years in North America, with 27 deals, the data show.
Information for this article was contributed by Matt Townsend and David Carey of Bloomberg News and staff members of The Associated Press.
Business, Pages 23 on 12/10/2013