HOUSTON & ROSEMONT, Ill. -- With Sysco Corp.'s announcement that it has terminated its merger agreement with US Foods, both companies moved swiftly to reassure customers, shareholders and the industry that their performance, initiatives and strategies would not be compromised by the derailed merger.
Sysco, Houston, and US Foods, Rosemont, Ill., are the largest broadline foodservice distributors in the United States. The companies announced the $8.2 billion merger in December.
As reported in a 21st Century Smoke/CSP Daily News Flash, the decision to call off the union comes just days after the U.S. District Court in Washington, D.C., granted the Federal Trade Commission's (FTC) request for a preliminary injunction to block the proposed merger over post-merger market share concerns.
The FTC complaint, filed in February, said a combined Sysco-US Foods would account for 75% of the national market for broadline distribution services. In addition, the parties would also hold high shares in 32 local markets. The FTC also charged that the proposed sale of 11 US Foods distribution centers to Performance Food Group would neither enable PFG to replace US Foods as a competitor nor counteract the competitive harm caused by the merger.
“The FTC has shown that there is a reasonable probability that the proposed merger will substantially impair competition in the national customer and local broadline markets and that the equities weigh in favor of injunctive relief,” the judge wrote in a two-page order.
Sysco has also terminated the agreement with PFG to purchase the facilities in 11 markets that the companies intended to help address the competition issues.
Under terms of the merger agreement, the termination of the transaction requires Sysco to pay breakup fees of $300 million to US Foods and $12.5 million to PFG.
"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 CEO. "We believed the merger was the right strategic decision for us, and we are disappointed that it did not come to fruition; however, we are prepared to move forward with initiatives that will contribute to the success of Sysco and our stakeholders."
Sysco also will begin the process of redeeming the $5 billion of merger-related debt under the mandatory redemption provisions contained within those notes. This process is expected to take no more than 40 days.
Both companies moved swiftly to reassure customers, shareholders and the industry that their performance, initiatives and strategies would not be compromised by the derailed merger.
DeLaney expressed confidence in Sysco's existing business, saying that the company will "continue to drive earnings through commercial and supply-chain initiatives, including category management and revenue management in our core business, as well as pursuing cost-saving opportunities."
Sysco continues to generate strong and stable cash flow, he said. "We have improved our discipline and efficiency in how we manage our substantial cash flow, and we are committed to grow our free cash flow over time as we move forward. We will continue to make prudent investments in our business. … And, we will continue to look for strategic acquisitions that will enhance shareholder value over time."
US Foods' president and CEO John Lederer also used the occasion of the termination announcement to announce US Foods' “Just Taking Off” campaign that officially marks the beginning of its re-launch "as an even stronger force in the foodservice industry."
“Throughout the unique environment of the past 18 months, we’ve continued to serve our customers by never forgetting what we’re about: delivering great food, cultivating talented food people and making it easy for our customers to work with us,” said Lederer. “It’s because of this unwavering dedication that I can confidently say that we are ready to take this company to the next level.”
The re-launch strategy will focus on innovation and "on accelerating the progress the company has already made."
He added that the company is in a "strong" financial position. Over the last 18 months, the company has invested millions of dollars into new technology and fleet and building improvements.
With approximately $22 billion in annual revenue, US Foods offers more than 350,000 products, including exclusive brands such as Chef’s Line, a time-saving, chef-inspired line of scratch-quality products, and Rykoff Sexton, a premium line of specialty ingredients sourced from around the world. The company proudly employs approximately 25,000 people in more than 60 locations nationwide. It is jointly owned by affiliates of Clayton, Dubilier & Rice LLC and Kohlberg Kravis Roberts & Co. LP.
Sysco is a global leader in selling, marketing and distributing food products to restaurants, healthcare and educational facilities, lodging establishments and other customers who prepare meals away from home. Its family of products also includes equipment and supplies for the foodservice and hospitality industries. The company operates 194 distribution facilities serving approximately 425,000 customers. For the fiscal year 2014 that ended June 28, 2014, the company generated sales of more than $46 billion.
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