US judge grants FTC request to stop Sysco merger with US Foods

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 on Monday said it would pay a $300 million break-up fee to walk away from its merger agreement with US Foods, a move that comes days after a U.S.

SYY -2.16 % abandoned its planned acquisition 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. Sysco, the nation’s largest purveyor of food and other supplies to restaurants and cafeterias, had been working on the merger for more than a year and a half when U.S. 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. Mehta of the Federal District Court for the District of Columbia, sided with the Federal Trade Commission in determining that putting together the two companies would harm consumers. The FTC called for an injunction, stating that the merger would lead to higher prices and diminished service for the restaurants, hotels and schools that contract food distributors. 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. 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. Sysco had said combining with its largest rival was vital because it would help the companies reduce costs and pass along those savings to customers, while other competitors would step up to vie for the No. 2 slot. 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. 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. Still, not everyone is confident Sysco can bounce back from this. “Sysco has embraced cost-reduction efforts before without much bottom-line benefit,” said Guggenheim analyst John Heinbockel.

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