Sysco to Buy Europe’s Brakes Group
Food service company to pay about $800 million, plus a $2.3 billion debt repayment
Sysco Corp. tractor trailers sit parked outside the company's distribution center in Louisville, Ky., on April 28, 2015. PHOTO: BLOOMBERG NEWS
Sysco Corp. agreed to acquire U.K-based food distributor Brakes Group for $800 million, sharply expanding the U.S. company’s overseas presence after regulators last year blocked its effort to buy its chief domestic rival.
Sysco Chief Executive Bill DeLaney said the Brakes acquisition, which also entails the assumption of $2.3 billion in debt, would provide a means to further international deals. Sysco now gets 90% of its nearly $50 billion in annual sales from the U.S., where it is the largest distributor of food and other supplies to buyers including restaurants, hospitals and school cafeterias, with more than 18% of the market.
“This is really about giving us the opportunity to expand geographically,” Mr. DeLaney said in an interview. “It’s a wonderful platform for acquisitions for future growth.”
Brakes is one of the biggest distributors in its home U.K. market and has operations across much of Europe, including countries such as France and Sweden that have more opportunity for consolidation than the U.S., Sysco said. Bain Capital LLC bought Brakes in 2007 and has invested in improving its e-commerce capabilities, distribution infrastructure and purchasing power through alliances with other distributors. In 2015, Brakes’ revenue rose 6.5% to nearly $5 billion.
Mr. DeLaney also said the areas where Brakes operates are “growing and underpenetrated compared to the U.S.”
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Houston-based Sysco in June said it was dropping its plan to acquire US Foods Inc. after a judge ruled against the deal, saying the combined company would have too much control over the marketplace. In August, activist investor Nelson Peltz of Trian Fund Management announced a stake in Sysco and was named to its board.
Sysco has spent the past several months regrouping and implementing a new strategy for growth that it unveiled in September. That blueprint included expansion internationally as well as generating some $400 million more in annual operating income through more stringent cost management and aggressive sales efforts.
Sysco, which had $48.7 billion in revenue for fiscal 2015, built its business by rolling up regional distributors and increasing its scale for purchasing food and getting it to customers more efficiently. The Brakes deal could help it do that in Europe.
However, some analysts said on a conference call Monday with Sysco executives that expanding to Europe given the concerns about the global economy could worry investors. Sysco’s shares closed down about 4.9% on Monday, but that is still up about 6% from a year ago.
Mr. DeLaney said Sysco had been watching Brakes for years, and considered acquiring it in the past. “This is something we have evolved and grown into, this is not something we slapped together,” he said. Sysco expects the deal to close by July.
The Brakes deal differs from the US Foods strategy, which was intended to save $600 million by integrating operations. The minimal overlap between Sysco and Brakes all but insures that regulators won’t push to prevent it on antitrust grounds, but it also means the cost cuts aren't a priority, Sysco executives said.
“Over time, we will identify some things we can do together, but we have modeled very little in the way of synergies,” Mr. DeLaney said.
Like Sysco, Brakes operates on a relatively thin profit margin. Mr. DeLaney said Brakes is working on lowering its expenses to bring that up.
Growing competition from smaller, specialty distributors and wholesale shops have put pressure on food distributors like Sysco in recent years.
Sysco pleased investors earlier this month with its quarterly earnings, posting 3.9% sales volume growth in the U.S., and an overall gross margin increase to 17.7% from 17.3% a year earlier.
