NEW YORK -- Sysco Corp. has agreed to acquire closely held US Foods for $3.5 billion, adding brands from Cattleman's meat to Devonshire desserts, in the largest food-distribution deal in eight years in North America.
Sysco will pay $3 billion in common stock and $500 million in cash for US Foods to owners including KKR & Co. and Clayton, Dubilier & Rice LLC, according to a statement Monday.
The deal bolsters Sysco's position as North America's largest distributor of food to restaurants, expanding its geographical reach and creating supply chain cost savings. The combined business, with about $65 billion in annual sales, will be led by Sysco Chief Executive Officer Bill DeLaney.
"There will be cost savings opportunities for Sysco and they didn't overpay, which the market is reacting favorably to," Jack Russo, an analyst an Edward Jones & Co., said in an interview. The companies cater to the same customers, so this deal is about becoming as efficient as possible by "becoming one large big company."
KKR and CD&R acquired US Foods for $7.2 billion from Royal Ahold in 2007. The two firms, which own 98 percent of US Foods, will reap about a $1.25 billion, or 55 percent, partly realized gain on their combined $2.25 billion equity investment, according to two people familiar with the situation who requested anonymity because the matter is private.
Separately, KKR and CD&R will earn a profit on stakes they took on US Foods' debt, one of the people said. As of Dec. 29, the two firms held $736 million in face value of the debt, according to a company filing. The bulk
of that debt was refinanced this year. CD&R came away with a 160 percent profit on the $375 million it paid for its notes, this person said.
Both Tom Franco, a spokesman for New York-based CD&R, and Jennifer Hanley, a KKR spokeswoman, didn't immediately return messages seeking comment.
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 the statement.
In seven purchases of food distribution and food-services assets of more than $1 billion in the past decade, buyers paid a median of 10 times unadjusted Ebitda, data compiled by Bloomberg show. Sysco didn't say how it adjusted US Foods' Ebitda.
The acquisition is expected to be completed late next year, Sysco executives said on a conference call Monday. Sysco currently has about 18 percent of the U.S. market and the new combined business would have about a quarter of it, the executives said.
The equity holders of Rosemont, Ill.-based US Foods will own about 13 percent of Sysco. A representative of each of US Foods' majority shareholders, affiliates of CD&R and New York-based KKR will join the board upon closing.
Today's transaction is the largest in the food wholesale and distribution industry since Albertsons was sold to several buyers for $16.1 billion in 2006, according to data compiled by Bloomberg. Sysco was the most acquisitive company in the industry in the past 10 years in North America, with 27 deals, the data also show.
Sysco's customers include Wendy's Co. The deal is expected to generate cost savings of at least $600 million after three to four years, coming from supply chain efficiencies and merchandising.
Goldman, Sachs is serving as financial adviser to Sysco and Wachtell, Lipton, Rosen & Katz and Arnall, Golden & Gregory are serving as its legal representation. Simpson Thacher & Bartlett and Debevoise & Plimpton are serving as US Foods' legal advisers.