By Annie Gasparro
Sysco Corp. on Monday said it abandoned its planned purchase of
rival US Foods Inc. following a federal judge's ruling against the
deal, forcing the food-distribution giant to find a new strategy
for its future that is likely to include smaller acquisitions.
Among its plans, Sysco said its board authorized new purchases
of $3 billion of its own stock over the next two years, equal to
about 13% of its total shares outstanding at recent prices.
U.S. District Judge Amit Mehta in Washington last Tuesday issued
a preliminary injunction against the deal on concerns it could hurt
competition, after the Federal Trade Commission filed a lawsuit in
February challenging the transaction on antitrust grounds.
"After reviewing our options...we have concluded that it's in
the best interests of all our stakeholders to move on," Sysco Chief
Executive Bill DeLaney said in a statement Monday. "However, we are
prepared to move forward with initiatives that will contribute to
the success of Sysco and our stakeholders."
"We will continue to make prudent investments in our business,"
Mr. DeLaney said, adding that Sysco would "continue to look for
strategic acquisitions." The company said it would fund the planned
stock buybacks through a combination of new borrowing and cash flow
from operations. Mr. DeLaney said Sysco expects to be able to
eliminate or avoid more than $750 million in annual product and
operating costs.
Many investors seem sanguine about the outcome. Sysco shares
rose 1.6% early Monday after gaining 2% last week following the
court's ruling, which came shortly after markets closed on
Tuesday.
Monday's announcement eliminates what has been Sysco's core
strategic plan for the future for at least the past 18 months,
since the deal to buy US Foods for $3.5 billion was announced in
December 2013. Sysco, which provides food and other supplies to
restaurants, hotels, and other clients, had said that combining
with its largest rival was vital because it would help the
companies reduce costs and pass along those savings to customers,
improving Sysco's shrinking profit margins and helping it compete
with newer and smaller rivals.
The failure has immediate as well as long-term costs. Sysco must
pay US Foods a $300 million breakup fee, on top of at least $355
million Sysco already had spent on integration planning, attorneys
and other merger-related costs as of the end of March. Sysco said
it also will pay a $12.5 million breakup fee to Performance Food
Group to terminate an agreement to sell it some of US Foods' assets
if that deal had closed.
Sysco could have appealed the judge's decision, but Sysco's Mr.
DeLaney had hinted at a conference earlier this month that it would
likely spend the summer coming up with a new three-year plan for
the business if the court ruling didn't go its way.
"While there is a tremendous strategic fit here with US Foods,
this was not a bet-the-company type of deal for us," Mr. DeLaney
said at the conference. "The savings will not be as great as what
the synergies would have been," but, he added, "there's actually
some things that we can probably do a little faster without the
deal."
At a board meeting Friday, Sysco executives recommended to
directors that they approve a plan to dismantle the US Foods plan
and take another route. That will likely entail smaller
acquisitions and expansion into markets where it couldn't have gone
had it been digesting US Foods and its some $20 billion in annual
sales.
Ahead of Monday's announcement, Andrew Wolf, an analyst at
BB&T Capital Markets, said smaller acquisitions could help
Sysco get into the business of selling ingredients to grocery
stores for their prepared foods and delis, which makes up about 10%
of food-distribution sales. "After decades of eschewing grocery
stores for their relative [small size] versus restaurants, Sysco
appears to be more focused on trying to serve this growing part of
the market," Mr. Wolf said.
"We had always seen risks with combining two large companies,
particularly as Sysco continues its own process of better
leveraging its size and scale," said Morgan Stanley analyst Vincent
Sinisi.
Still, not everyone is confident Sysco can bounce back from
this. "Plan B" sends the company back to its yearslong cost-cutting
plan that was put on hold when US Foods approached it about a
merger in late 2013.
"This plan B is not that compelling to us," said Guggenheim
analyst John Heinbockel. "Sysco has embraced cost-reduction efforts
before without much bottom-line benefit."
In Judge Mehta's more-than-100-page decision, released Friday,
he said the Sysco-US Foods tie-up was the type of large combination
that lawmakers were concerned about long ago when they gave the
government the power to halt mergers.
"The proposed merger of the country's first and second largest
broadline food service distributors is likely to cause the type of
industry concentration that Congress sought to curb at the outset
before it harmed competition," the judge wrote.
Write to Annie Gasparro at annie.gasparro@wsj.com
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