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

Jason Dean
The Wall Street Journal
December 09, 2013
View the original piece

The combined company will 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 estimates the combined company will have about 25% of the U.S. food distribution market, up from about 18% now for Sysco alone.

Sysco Chief Executive Bill Delaney said 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, but even with some divestitures this is still a very good deal," he said on a conference call.

Sysco's shares rose 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.

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 third quarter of 2014.

US Foods main shareholders—private firms Clayton, Dubilier & Rice LLC and Kohlberg Kravis Roberts KKR & Co.--will join Sysco's board.

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.

Mr. Delaney said that 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." But the purchasing power, combined innovation efforts and cost savings on the merger will position the new company well, he said.

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 focused more 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 who 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 now has grown to have $44.4 billion in revenue last year, with 48,100 employees world-wide. About 60% of its customers are restaurants.

Sysco has struggled in recent years with higher prices for food and relative weakness in the restaurant industry, as consumers dialed back spending on eating out. Sysco's net profit in the fiscal year ended June 29 fell 12% to $992.4 million from $1.12 billion.

Corrections & Amplifications
An earlier version of this story gave an incorrect location for US Foods' headquarters.


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