SYSCO Corporation (NYSE:SYY) shares soared today with the announcement that the restaurant supply and food giant will be acquiring the privately held US Foods, a key rival. The move will create a mammoth global distribution company that is expected to raise Sysco’s annual sales by nearly 50% to somewhere around $65 billion. Shares traded up as much as 26%, and saw Sisco trading at an all time high. At the time of this writing (1:40 PM EST) shares were trading at $38.23, up $3.92 or 11.93%.
Sysco terms of the deal
The Houston-based SYSCO Corporation (NYSE:SYY) will pay $3 billion in common stock in addition to $500 million in cash. With the assumption of US Foods’ debt, the deal is valued at about $8.2 billion. That represents a multiple of 9.9 times US Foods’ adjusted earnings before interest, depreciation and amortization, according to a statement by Sysco.
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The bulk of this will be paid to Clayton, Dubilier & Rice LLC and Kohlberg Kravis Roberts & Co. LP with both of these investment firms expect to see a representative elected to Sysco’s Board of Directors.
According to SYSCO Corporation (NYSE:SYY) President and CEO Bill DeLaney who will remain at the helm of the new company, the move was seen as advantageous to the food giant as the two companies have complimentary core strengths in addition to large portfolios of products.
“There will be cost savings opportunities for SYSCO Corporation (NYSE:SYY) and they didn’t overpay, which the market is reacting favorably to,” said Jack Russo, an analyst an Edward Jones & Co., said in an interview with Bloomberg News. The companies cater to the same customers, so this deal is about becoming as efficient as possible by “becoming one large big company.”
Profits and savings
Additionally, the deal will create supply chain savings at the same time that it widens Sysco’s global reach.
SYSCO Corporation (NYSE:SYY) has 193 locations in U.S., Bahamas, Canada, Ireland and Northern Ireland from which it distributed cooking supplies to over 400,000 customers last year while seeing sales of $44.41 billion. Most of these sales were made to restaurants and restaurant chains, including Wendy’s. With the pickup of US Foods, SYSCO Corporation (NYSE:SYY) will be expanding its reach to health care and hospitality companies, and government and educational institutions in addition to the restaurants supplied by US Foods.
The buyout that is expected to be concluded in third quarter of calendar year 2014 has already been approved by the boards of both companies. The deal is expected to bring immediate profits as well as an annual cost savings of no less that $600 million within three to four years.