Senior financial analysts at Tochigi Ontario Holdings have today reported on American multinational food firm, Sysco, revealing it will buy U.S. Foods for a $3.5 billion cash and stock takeover, from Kohlberg Kravis Roberts (KKR) and Clayton, Dubilier & Rice (CDR).
"Sysco and U.S. Foods will have an annual sale of $65 billion and a cash flow of $2 billion. One-third of this combined revenue will come from U.S. Food's sale, approximating about $22 billion," said Jonathan Turner, Head of Corporate Trading at Tochigi Ontario Holdings.
Sysco has already witnessed a hype of about 10% in their sales on Monday afternoon trading. This reveals that the investors sense a sturdy strategic merger, which will lead to rapid growth and cut down costs.
Houston-based Sysco will pay $3 billion in cash and $500 million in stock for U.S. Foods and has agreed to refinance its approximately $4.7 billion in outstanding debt. After counting debt, Sysco's total acquisition comes around at $8.2 billion. In a press release, Sysco has secured a fully committed bridge financing for the deal and expects to issue permanent financing before closing.
As a part of this deal, Sysco stated that it would uphold an investment-grade credit rating. It is also expected to witness instant benefits once the sale is closed.
CDR and KKR had purchased U.S. Foods in May 2007 for $1.7 billion from Royal Ahold. Sale of U.S. Foods is thought to put the problematic acquisition of U.S. Foods to rest, which is the clash of the company's union workers and heavy debts after the 2007 Leveraged Buyout. It is also an indicator of increased demand for food services suppliers because private-equity-backed Aramark is going ahead with an initial public offering.
"As a part of the U.S. Food acquisition, CDR and KKR will accept a part of Sysco's stock. Once the deal is complete, CDR and KKR combined will hold 13% of the outstanding stock or 87 million in Sysco shares. There will be a representative for both the funds on Sysco's board," said Michael Walker, Director of Corporate Equities.
The President and Chief Executive Officer of U.S. Foods, John Lederer, said that the merger would intensify the strengths of the two great companies, and this will prove advantageous to the customers of the company who face the challenges of the demanding environment every day.
Sysco identified that they were purchasing U.S. Foods at a multiple of just under 10-times its trailing 12-month adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization(EBITDA) of $826 million. The deal will elicit an annual reduction in the cost of $600 million after 3-4 years, mainly from merchandising activities, supply chain competencies, and overlying general and administrative functions.
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| Tochigi Ontario Holdings reports on Sysco buying U.S. Foods from KKR, CDR for $3.45 billion |
Analyst of Credit Suisse, Edward J. Kelly, said that Sysco's acquisition would create an industry powerhouse that is five times more than the next largest competitor. The merger broadens geographic coverage and product offering, combines two companies with similar ideas, and creates projected collaborations worth at least $600 million, approximately 2% to 3% of the acquired sales. The analyst also upgraded Sysco shares from 'underperform' to 'neutral' and raised the 12-month price target for the company's shares from $32 to $40.
Kelly also emphasized on a probable Federal Trade Commission antitrust review as a possible risk to this deal, given that U.S. Foods and Sysco could control about one-fourth of the overall food distribution market mutually.
Before Monday trading, Sysco's 8% year-to-date gain had underperformed the S&P 500 Index.
Sysco's financial advisor is Goldman, Sachs and Wachtell, Golden & Gregory, Lipton, Rosen & Katz, and Arnall working as Sysco's legal advisers. The legal advisers to U.S. Foods are Debevoise & Plimpton and Simpson Thacher & Bartlett.