Sysco Walks Away From US Foods Merger
Scrapping of deal comes days after federal judge halted the transaction
Sysco Corp. tractor trailers sit parked outside the company's distribution center in Louisville, Ky., in April. PHOTO: BLOOMBERG NEWS
Sysco Corp. on Monday said it abandoned its planned purchase of rival US Foods Inc. following a federal judge’s ruling against the deal, forcing the food-distribution giant to find a new strategy for its future that is likely to include smaller acquisitions.
Among its plans, Sysco said its board authorized new purchases of $3 billion of its own stock over the next two years, equal to about 13% of its total shares outstanding at recent prices.
U.S. District Judge Amit Mehta in Washington last Tuesday issued a preliminary injunction against the deal on concerns it could hurt competition, after the Federal Trade Commission filed a lawsuit in February challenging the transaction on antitrust grounds.
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- Federal Judge Halts Sysco-US Foods Merger (June 23)
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- FTC Files Lawsuit Challenging Sysco-US Foods Merger (Feb. 20)
- Sysco, US Foods to Face Off Against FTC at Hearing (May 3)
- US Foods Will Kill Sysco Deal if Court Delays Merger, Executive Says (May 11)
- Judge Presses Both Sides in Battle Over Sysco Merger (May 28)
“After reviewing our options…we have concluded that it’s in the best interests of all our stakeholders to move on,” Sysco Chief Executive Bill DeLaney said in a statement Monday. “However, we are prepared to move forward with initiatives that will contribute to the success of Sysco and our stakeholders.”
“We will continue to make prudent investments in our business,” Mr. DeLaney said, adding that Sysco would “continue to look for strategic acquisitions.” The company said it would fund the planned stock buybacks through a combination of new borrowing and cash flow from operations. Mr. DeLaney said Sysco expects to be able to eliminate or avoid more than $750 million in annual product and operating costs.
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A federal judge ruled in favor of the Federal Trade Commission and blocked a merger between Sysco and US Foods on antitrust grounds. WSJ’s Brent Kendall joins Lunch Break with Tanya Rivero. Photo: AP
Many investors seem sanguine about the outcome. Sysco shares rose 1.6% early Monday after gaining 2% last week following the court’s ruling, which came shortly after markets closed on Tuesday.
Monday’s announcement eliminates what has been Sysco’s core strategic plan for the future for at least the past 18 months, since the deal to buy US Foods for $3.5 billion was announced in December 2013. Sysco, which provides food and other supplies to restaurants, hotels, and other clients, had said that combining with its largest rival was vital because it would help the companies reduce costs and pass along those savings to customers, improving Sysco’s shrinking profit margins and helping it compete with newer and smaller rivals.
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The failure has immediate as well as long-term costs. Sysco must pay US Foods a $300 million breakup fee, on top of at least $355 million Sysco already had spent on integration planning, attorneys and other merger-related costs as of the end of March. Sysco said it also will pay a $12.5 million breakup fee to Performance Food Group to terminate an agreement to sell it some of US Foods’ assets if that deal had closed.
Sysco could have appealed the judge’s decision, but Sysco’s Mr. DeLaney had hinted at a conference earlier this month that it would likely spend the summer coming up with a new three-year plan for the business if the court ruling didn’t go its way.
“While there is a tremendous strategic fit here with US Foods, this was not a bet-the-company type of deal for us,” Mr. DeLaney said at the conference. “The savings will not be as great as what the synergies would have been,” but, he added, “there’s actually some things that we can probably do a little faster without the deal.”
At a board meeting Friday, Sysco executives recommended to directors that they approve a plan to dismantle the US Foods plan and take another route. That will likely entail smaller acquisitions and expansion into markets where it couldn’t have gone had it been digesting US Foods and its some $20 billion in annual sales.
Ahead of Monday’s announcement, Andrew Wolf, an analyst at BB&T Capital Markets, said smaller acquisitions could help Sysco get into the business of selling ingredients to grocery stores for their prepared foods and delis, which makes up about 10% of food-distribution sales. “After decades of eschewing grocery stores for their relative [small size] versus restaurants, Sysco appears to be more focused on trying to serve this growing part of the market,” Mr. Wolf said.
“We had always seen risks with combining two large companies, particularly as Sysco continues its own process of better leveraging its size and scale,” said Morgan Stanley analyst Vincent Sinisi.
Still, not everyone is confident Sysco can bounce back from this. “Plan B” sends the company back to its yearslong cost-cutting plan that was put on hold when US Foods approached it about a merger in late 2013.
“This plan B is not that compelling to us,” said Guggenheim analyst John Heinbockel.“Sysco has embraced cost-reduction efforts before without much bottom-line benefit.”
In Judge Mehta’s more-than-100-page decision, released Friday, he said the Sysco-US Foods tie-up was the type of large combination that lawmakers were concerned about long ago when they gave the government the power to halt mergers.
“The proposed merger of the country’s first and second largest broadline food service distributors is likely to cause the type of industry concentration that Congress sought to curb at the outset before it harmed competition,” the judge wrote.
