Sysco Buys Out U.S. Foods, To Create $65 Billion Food Distributor Network

Food distribution giants Sysco Corporation (NYSE:SYY) and U.S. Foods Inc. have struck an $8.2 billion merger deal, announced on Monday, to form a company they expect will have $65 billion in annual sales.

Sysco bought out U.S. Foods, paying $3.5 billion for a stake in U.S. Foods. It also agreed to take on or refinance U.S. Foods’ debt, now about $4.7 billion. The transaction is expected to close in the fall of 2014.

The two food companies lauded the synergy benefits they will receive thanks to the deal, which they put at $600 million after three years of initial partnership. Sysco is the larger partner, with sales of $44 billion in fiscal 2013, compared to U.S. Foods’ annual sales of $22 billion.

U.S. Foods is one of America’s largest private companies and is jointly owned by private equity giants Clayton, Dubilier & Rice (CD&R) and KKR & Co. LP (NYSE:KKR), who bought out U.S. Foods in 2007 for $7.1 billion. The deal values U.S. Foods at about 10 times its past 52 weeks of raw earnings before interest, taxes and depreciation. Representatives from the two private equity firms will have two seats on Sysco’s board.

Sysco shares jumped 30 percent in pre-market trading, to $44.35 per share. That’s an all-time high if it holds throughout Monday, according to the AP.

“We have the opportunity to create a world class foodservice company,” said Sysco CEO Bill DeLaney, in a video on the merger website.

Both Sysco and U.S. Foods use their truck fleets to distribute frozen and packaged food across the U.S. They both sell to restaurants, hospitals and schools. Sysco held a conference call on Monday morning with more information on the deal, which can be found here.

Sysco has fared well in its latest quarter, wrote Morningstar Inc. (NASDAQ:MORN) analyst Erin Lash in a Nov. 4 note.

“Sales volume will likely remain lumpy in the near term, but we believe Sysco's expansive distribution network… will enable the firm to remain the dominant player,” she wrote.

Sysco has about 17 percent market share in the fragmented foodservices market, wrote Citigroup Inc. (NYSE:C) analysts in an August 2013 note. Although Sysco is the “clear industry leader,” the industry could expand by only 1 percent to 2 percent annually in the near future, as price wars and unconventional competitors – even Amazon.com Inc. (NASDAQ:AMZN) – play more of a role. Citi analysts then lowered their EPS estimates and target price for Sysco.