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In what may be the most strategic, game-changing play in the food service sector in the United States, Sysco (NYSE:SYY) has announced that it will acquire it’s largest competitor, US Foods. The Sysco share price rose more than 25% before the opening bell on the New York Stock Exchange from its previous close of $34.31 on Friday, 06 December.
Sysco’s share price opened at 43.06, but it has withdrawn to just under $40.00 ($39.98) at 10:21 am EST.
The two companies prepared well for the announcement, with Sysco having built an entirely new website, www.bestofbothinfood.com, prepared specifically about the merger, presenting it as a visual treat for the eyes in just the same manner that it presents its products. If British investors are not keenly aware of Sysco as yet, be prepared, because, in my opinion, this is just the beginning of greater expansion to come. Sysco is already describing the new venture as the creation of a “world-class food-service company.”
According to Sysco’s regular website, the company already operates 193 distribution centers in the US and had a record sales volume of $44 billion as of the year ending 29 June 2013. To give you a more graphic understanding of the sheer size and presence of Sysco, I seriously doubt that any American in any medium to large population center goes through a day without seeing at least one Sysco 18-wheeler on the road or delivering product, whether to restaurants, sporting venues, or supermarkets. In fact, I think that I would be fairly accurate in saying that the only brand company with more over-the-road delivery trucks in the US would be Walmart. Even if that’s not true, it sure seems like it.
The merger, which is expected to be completed in the third quarter of 2014, will cost Sysco $3.5 billion for the equity in US Foods and will be accomplished through the issuance of $3.0 billion in common shares and an additional $500 million is cash. Current equity holders in US Foods will end up owning a collective 13% of Sysco. By assuming $4.7 billion in US Foods debt, the enterprise value of the deal stands at $8.2 billion.
Sysco President and CEO, Bill DeLaney’s perspective on the deal is that “ Sysco and US Foods have highly complementary core strengths including a broad product portfolio and passionate food people deeply committed to customer service, quality-assured products and safety. In particular we look forward to welcoming US Foods’ talented employees and continuing to invest in the development of all of our people. Together we will strive to enhance shareholder value by providing our customers with highly differentiated products and services.”
A portion of the announcement this morning contained a paragraph entitled “Compelling Strategic Rationale.” Whilst investors will naturally gravitate towards financial details, in this case this may be the most important statement in the entire announcement, as it makes Sysco’s strategy crystal clear. “Increased geographic coverage and scale will enhance our flexibility and responsiveness as we provide unique, on-trend food products that save customers time and improve performance.” Personally, I see this activity as preparing to move outside the natural boundaries of the United States. Even so, Sysco is going to remain strong as long as people continue to eat.
Sysco expects that, once the deal is consummated, annual sales will be near the $64 billion mark with about $2 billing of positive cash flow being generated.
