Food company, Sysco Corp (SYY) has announced its decision to buy U.S. Foods in a deal that has a total enterprise value of approximately $8.2 billion, inclusive of debt. The combined company will create one of the largest food companies in the country.
Per the deal, Sysco will pay approximately $3.5 billion, which would include common stock worth $3 billion and $500 million of cash for the equity of U.S. Foods. In addition, Sysco will also assume the latter’s outstanding debt of about $4.7 billion. The deal has been approved by the boards of both companies and is expected to close in the third quarter of 2014. Sysco expects immediate accretion to earnings per share after adjusting for transaction-related costs and amortization of intangibles.
Sysco has secured a fully committed bridge loan to finance the deal and expects to issue a long-term debt to repay the bridge loan. At the end of the first quarter of fiscal 2014, Sysco had cash and cash equivalents of $359.5 million. Total debt stands at $3.13 billion, resulting in a net debt position of $2.77 billion. Including the $5.2 billion of cash and debt ($500 million of cash and $4.7 billion of debt) to buy U.S. Foods, net debt will now be $8 billion.
Sysco is also committed to paying a quarterly dividend of 28 cents per share, as announced prior to the deal. After the completion of the deal, Sysco will receive annual synergies of at least $600 million per annum over the next three or four years.
The deal is expected to be a strategic fit for both Sysco and US Foods, as together they are expected to improve efficiencies, particularly in supply chain, merchandising and general and administrative activities.
Sysco has carried out various acquisitions over the years to grow its distribution network and customer base and boost long-term growth. During fiscal 2013, the company acquired 14 companies, which represent annualized sales in excess of $1 billion. Sysco acquired foodservice operations in Nassau, Bahamas; San Francisco, San Jose, and Stockton, Calif.; Ontario and Quebec, Canada; Orlando, Fla; Dublin, Ireland; St. Cloud, Minn.; Co. Down, Northern Ireland; Greenville, Ohio and Houston, Texas. The company expects to achieve 0.5%–1% sales growth through acquisitions in the long term. Other than sales growth, these acquisitions expand Sysco’s presence in the international markets and improve product assortment.
We believe that the Sysco-US Foods deal will provide excellent value in an increasingly competitive market. The combined companies are expected to have annualized sales of approximately $65 billion and generate operating cash flow of approximately $2 billion.
Sysco currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the food industry include Omega Protein Corp (OME), ConAgra Foods Inc. (CAG), and Pinnacle Foods Inc (PF). While Omega sports a Zacks Rank #1 (Strong Buy), ConAgra and Pinnacle hold a Zacks Rank #2 (Buy).