Sysco Corp. is trying to persuade regulators that intense
competition in the food-service industry justifies its planned $3.5
billion merger with US Foods Inc.
It now could have fresh material to bolster its argument: a
lofty valuation for a rival that indicates a growing competitive
threat.
Jetro Holdings LLC., which operates restaurant-supply retailers,
recently bought back a sliver of its shares at a price that values
the closely held company at about $9 billion, people familiar with
the matter said. That is nearly nine times the company's value 10
years ago, underscoring its rapid growth.
Analysts say competitors such as Jetro's Restaurant Depot LLC
and small specialty suppliers are increasing pressure on Sysco and
US Foods. Sysco's operating profit margin shrank to 3.7% in the
fiscal year through last June from 5.3% in fiscal 2010.
Restaurant Depot, founded in New York in 1990, supplies small,
independent restaurants and grocery stores. A few years later it
combined with Jetro Cash-and-Carry, which was founded in 1976 and
focuses on urban convenience stores and small grocers.
Jetro Holdings has expanded swiftly, particularly since 2004,
when private-equity firms CCMP Capital Advisors LLC and Leonard
Green & Partners LP bought minority stakes. Those deals valued
Jetro, which is controlled by South African billionaire Nathan
Kirsh, at just over $1 billion, the people said.
Jetro in late March sold $1 billion of debt and used much of the
proceeds to buy back an 8% stake from CCMP, the people familiar
with the matter said. The deal implies a $9 billion value for
Jetro, they said.
Including earlier dividend payments, CCMP has made about 10
times its original investment of about $200 million, the people
said. The figure includes an 11% stake in Jetro that CCMP still
holds and is valued at about $1 billion, the people said.
Jetro's size still pales in comparison with that of Sysco and US
Foods, which together have about $65 billion in annual sales. Jetro
had sales of about $8 billion last year, the people said. But
Jetro's revenue has increased at double-digit percentage rates over
the last several years, faster than Sysco's, one of the people
said.
Today there are more than 100 Restaurant Depot and Jetro
locations, up from about 40 in 2004. In warehouse settings, they
stock staples like wheels of cheese, salad dressing and soy sauce
by the gallon and 50-pound bags of flour, as well as supplies
including beer pitchers, plastic cutlery and aluminum pans. Unlike
Sysco, Restaurant Depot doesn't have purchasing minimums or
additional fees, as for delivery.
"Local restaurants still make up a high percentage of our
business, and we need to be more productive and efficient to
compete with cash-and-carry for their business," Sysco Chief
Executive Bill DeLaney said recently.
Sysco says merging with US Foods, the No. 2 in the industry,
will help it trim $600 million in annual costs and allow it to
lower prices for customers, such as restaurants, schools and
hospitals.
But the proposed merger--which would create a company with 25%
of the market--has stirred objections, as the combined company
would have more leverage in price negotiations.
Brian Shapiro stocks his family's Indianapolis eatery from
Restaurant Depot but still relies on US Foods for most food and
supplies. "Depot gives very competitive pricing, but it has a
limited number of items," Mr. Shapiro said. "I could never use it
for everything."
The Federal Trade Commission is reviewing the proposed merger,
and in February asked the parties for more information.
Sysco on Monday said net income for its fiscal third quarter
fell 10% from a year earlier, even though revenue rose 3.2% to
$11.28 billion. Profit fell to $180.9 million, or 31 cents a share,
for the quarter through March, down from $201.4 million, or 34
cents a share.
The Houston-based company blamed unusually severe winter weather
in January and February for rising delivery expenses and slow sales
growth.
Sysco said March and April sales have been significantly
stronger than the first two months of the year. Its shares rose 98
cents, or 2.7%, to close at $37.19 on Monday.
Inflation in the meat and dairy industries will raise Sysco's
revenue in the current quarter, but the company may have to absorb
some of the added cost. "It's challenging at times to pass that
along as fast as you might like to the customers; sometimes that's
not even the right thing to do," Mr. DeLaney said. Salespeople can,
however, work with customers to add poultry to their menus when
beef costs are high, he said.
Ben Fox Rubin contributed to this article.
Write to Ryan Dezember at ryan.dezember@wsj.com and Annie
Gasparro at annie.gasparro@wsj.com
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