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Log In / Register | Apr 17, 2014

Sysco Pays $3.5B for US Foods; Franchises Wary

A Sysco truck arrives on Main Street, Park City, Utah
A Sysco truck. photo by Don Buciak II

HOUSTON and ROSEMONT, Ill.—Sysco Corporation (NYSE:SYY) has agreed to pay approximately $3.5 billion for US Foods, announced the two companies on Monday. Sysco will also assume or refinance US Foods' net debt, which is approximately $4.7 billion, bringing the transaction value to $8.2 billion. It expects the deal to finalize in the third calendar quarter of 2014.

With annual sales of $44 billion in its 2013 fiscal year that ended on June 29, Sysco provides restaurant chains such as Wendy's with products from pork to forks, and services hotels, prisons and hospital cafeterias. With $22 billion in annual revenue, US Foods distributes to multi-unit restaurant and hospitality entities a wide range of foodservice products, from scratch-resistant kitchenware to condiments.

Bill DeLaney, Sysco president and chief executive officer, will lead the combined company, which will continue to be named Sysco and be headquartered in Houston, Texas. When the deal closes, Sysco will have estimated annual sales of approximately $65 billion.

Deal could run afoul of antitrust regulators

DeLaney stressed the synergy of combining the two giants. The company aims to provide better geographic coverage, customer cost savings, broader product assortment and delivery performance improvement. "Together we will strive to enhance shareholder value by providing our customers with highly differentiated products and services," said DeLaney.

But the mega might of the two combined companies might spark monopoly concerns by the Federal Trade Commission. According to New York Times' Dealbook, "While restaurants can still choose from thousands of smaller distributors of ingredients, pots and table linens, the deal will give Sysco 25 percent of the market for food distribution, up from 18 percent. With US Foods off the map, Sysco's next nearest competitor, Performance Food Group, would have just 5 percent of the market. That concentration of power immediately raised concerns that the deal could fall afoul of antitrust regulators."

The FTC might require some sort of divestiture of parts of the proposed mega merger to be approved. "Even with some divestitures, we still see this as a very attractive deal," responds Sysco's CEO to that concern.

Franchisees wary of supply consolidation

Some analysts and franchisee leaders are concerned about the concentration of supply power. But George Hoffman, chief executive officer of Restaurant Services Inc., which is owned by all of Burger King's franchisees, says, "This merger poses no issues for Burger King at this time." RSI is the industry's largest franchisee supply chain management cooperative. It does the work of Sysco and US Foods in managing the supplies and distribution of goods to the 7,476 Burger King franchises and company-owned restaurants in the United States and Canada. Hoffman says that Sysco does not have an account directly with RSI, rather, only 3 of RSI's 29 regional distribution centers individually contract with it.

Restaurant economic analyst John Gordon of San Diego-based Pacific Management Consulting Group stresses that large national chain customers will not be affected much, since they already have ongoing contracts and markups. Gordon thinks the merger may be a bigger deal to what are called smaller "street customers" of 50 or so restaurants rather than to large national chains with hundreds or even thousands in the franchise space that have tough negotiated contracts with Sysco or US Foods.

CEO Hoffman agrees. "This consolidation does not pose as much threat to the Burger King system as it does to smaller chains that rely on full service distributors to manage their entire system supply chains, including promotions and inventory management, which are services that distributors such as Sysco and US Foods provides," he says. "Broad line distributor customers (street customer and small chain accounts) will pay higher distribution fees over time as a result of this merger as there will be fewer competitors to bid for their business," anticipates the head of Burger King's national franchisee-owned cooperative.

There's another looming problem. Large chain competitors who purposely prefer using several separate vendors so as to not have too much concentration of vendor power may now feel ill served by having a single merged distributing company. "Will some of these competitor restaurant chains bolt from the newly merged Sysco/US Foods?" questions Gordon.

Hoffman thinks that this trend of distribution consolidation reaffirms the wisdom of RSI's long term strategy in having his system's regional distribution centers contract locally. He thinks that gives Burger King's system of restaurants more competition and a chance to prove strong performance, rather than heavily relying on a national distributor vendor for the system's supply chain management. "We are very fortunate to have RSI be able to perform the services that national distributors such as Sysco and US Foods provide their customers," says the supply chain CEO for Burger King. Since franchisees own and direct Restaurant Service Inc, they are provided with financial details on the company's expenses, fees and markups. Experts say such transparency and ownership helps significantly flatten food and equipment costs.

Sysco thinks critics will come to see their larger company as a good thing. "We believe we will really raise the bar for the entire industry," said CEO DeLaney.

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