Sysco Ends Plans to Merge With US Foods -- 2nd Update

By Annie Gasparro 

Sysco Corp. abandoned its planned acquisition 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.

Sysco, the nation's largest purveyor of food and other supplies to restaurants and cafeterias, had been working on the merger for more than a year and a half when U.S. District Judge Amit Mehta in Washington last week issued a preliminary injunction to stop the deal on concerns it could hurt competition. The Federal Trade Commission had filed a lawsuit in February challenging the transaction on antitrust grounds.

Bill DeLaney, Sysco's chief executive, said that after reviewing its options, including whether to appeal the judge's decision, the company determined it was best to move on.

"We've turned the page," Mr. DeLaney said in an interview on Monday. He said Sysco is now focused on the possibility of smaller acquisitions, its plan to eliminate costs, and efforts to update its product offerings and technology to compete with rivals that have more natural-and-organic items and online ordering. "Merging with US Foods was not our entire strategy," he said.

As a first step, Sysco said on Monday that 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. It will fund the planned stock buybacks through a combination of new borrowing and cash flow from operations.

Still, Monday's announcement eliminates what had been Sysco's core strategic plan for its future since the deal to acquire US Foods for $3.5 billion was disclosed in December 2013. Sysco had said combining with its largest rival was vital because it would help the companies reduce costs and pass along those savings to customers, while other competitors would step up to vie for the No. 2 slot.

A deal would have added about $20 billion in annual revenue from US Foods to Sysco's $46.5 billion in annual sales, creating a combined company with about 25% of the national market--although the government said the figure was much higher in some regions.

The deal's collapse 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 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.

US Foods Chief Executive John Lederer said the past 18 months haven't detracted from its day-to-day business, and that it has invested millions of dollars into new technology and improvements to its trucks and warehouses. "It's because of this unwavering dedication that I can confidently say that we are ready to take this company to the next level, " he said in a statement.

On Monday, shares of Sysco fell 2.2% to $37.54 in 4 p.m. trading on the New York Stock Exchange. But the news of the breakup wasn't entirely a surprise. Mr. DeLaney hinted earlier this month that Sysco would likely come 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 in the June 9 presentation. "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."

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 make 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.

Still, not everyone is confident Sysco can bounce back from this. "Sysco has embraced cost-reduction efforts before without much bottom-line benefit," said Guggenheim analyst John Heinbockel.

In Judge Mehta's lengthy decision, released on 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 [U.S.'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.

The FTC said on Monday that the decision to abandon the merger "is a victory for both competition and consumers."

Write to Annie Gasparro at [e-mail]

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