Stock markets plummet; Sysco drops US Foods merger plan; AOL takes over …

30 Jun 2015 | Author: | No comments yet »

Regulators Just Effectively Killed Another Big M&A Deal.

Foods distributor Sysco said on Monday it would terminate a $8.2 billion acquisition of private equity-owned competitor US Foods , undoing what was a closely followed deal that may also have wider ramifications on merger and acquisition activity on Wall Street.

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. The deal’s cancellation comes just days after a federal judge granted the Federal Trade Commission’s request for an injunction on antitrust grounds. 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. In December 2013, private equity firms KKR & Co. and Clayton, Dubilier & Rice agreed to sell privately held US Foods to Sysco for $3.5 billion, or an enterprise value of roughly $8.2 billion, a merger that would have combined the two largest foods distributors in the United States.

Sysco also needed to pay $12.5 million to Performance Food Group, which would have purchased some US Foods facilities as part of the deal. “After reviewing our options, including whether to appeal the Court’s decision, we have concluded that it’s in the best interests of all our stakeholders to move on,” said Bill DeLaney, Sysco president and chief executive officer. 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.

State attorneys general in California, Illinois, Iowa, Maryland, Minnesota, Nebraska, Ohio, Virginia, Pennsylvania, Tennessee, North Carolina, and the District of Columbia joined the FTC in its complaint this February. The FTC was worried that that would tilt the power too heavily in favor of the foodservice distribution service companies, hurting customers like restaurants, hospitals, hotels and schools, which could have faced higher prices.

Yet Deutsche Bank analyst Karen Short argues Sysco’s shares could rise — “albeit not to the same degree that a Sysco/US Foods’ merger could” — because of the potential for buybacks. It was the latest instance of the Obama administration flexing its antitrust muscles, having successfully blocked deals by the likes of Comcast and AT&T. As for the company’s next step – its “Plan B” – Bania anticipates an Investor Day in September where the company will unveil more details regarding its next step. 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.

As she wrote: …we had estimated potential stock price downside risk to ~$33 for SYY shares under a scenario in which the FTC prevails in court (see our 5/5/15 note here); however, our downside scenario does not take into account any potential plan B scenarios (buybacks, other acquisitions, etc.), in which Sysco may pursue other ways to enhance shareholder value, which we believe the market already anticipates at this point. She adds that while Sysco lost time and money in attempting this merger, the company probably doesn’t have to worry about competition from a larger rival. Sysco has recently commented that, in the event of the merger being blocked, it would consider acquisitions in adjacent industries (potentially including but not limited to the grocery distribution business) and/or other international geographies as well as ongoing pursuit of acquiring smaller companies.

The evidence shows that Sysco and US Foods were strong rivals in broadline food distribution whose combination would have harmed consumers,” Debbie Feinstein, director of the regulator’s Bureau of Competition, said in a statement. 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.

In this respect, KKR was a leader after selling Alliance Boots to Walgreens in 2012, and Big Heart Brands, formerly known as Del Monte Foods , to J.M. 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.

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.

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