We might be looking at a banner year for mergers. With 2015 not yet two months old, several multibillion-dollar deals have already been announced. One that just might unravel, though, is Sysco's (SYY 1.74%) play for privately held archrival US Foods.
Last week, the Federal Trade Commission started administrative proceedings aimed at halting the merger. Sysco immediately said it would contest the ruling. For the company, it's very much a deal worth battling for.
Food fight
Food supply giant Sysco is a familiar name not only to those in its industry, but also to income investors. The stock is a Dividend Aristocrat, one of the rare companies that has raised its distribution at least once annually for a minimum of 25 consecutive years.
Coughing up those rising payouts must have helped prepare the company to spend big. In December 2013, Sysco and US Foods agreed to an acquisition priced at a meaty $8.2 billion. This was to consist of $3 billion in Sysco stock, $500 million in cash, and the assumption of roughly $4.7 billion in US Foods' debt.
Owning that stock would give US Foods and its majority shareholders -- private equity kingpin KKR (KKR 0.19%) and two affiliates -- roughly 13% of the new Sysco. The three would be granted one board seat apiece at the bulked-up company.
US Foods is in Sysco's sights because the duo are the nation's two top broadline foodservice distributors, meaning they can provide a complete line of comestibles, plus any related nonfood items (tables, napkins, etc.) for their customers.
And that's what is sticking in the FTC's craw, now that the regulator has had over a year to pore over the two companies' operations (plus negotiate with them -- obviously unsuccessfully -- to reach a settlement on the deal). The commission's press release on its "administrative challenge" to the merger stated that the deal "would eliminate significant competition in the marketplace and create a dominant national broadline foodservice distributor."
According to the FTC, the combination of Sysco and US Foods would control about 75% of the broadline segment. The commission said the pair "are the only broadline distributors with numerous distribution centers spread throughout the country."
A close vote
The FTC's legal challenge squeaked by with support from three of its five commissioners. Sysco made sure to emphasize the tight vote in its response to the news, in which it vowed to contest the commission's challenge.
As well it should. The company has failed to stem a decline in profitability of late, with the bottom line falling in each fiscal year since 2010 -- from nearly $1.2 billion in that year to $932 million for 2014, a 21% decline. That's due to rising costs (up by 27% across that span of time), which have eaten away at revenue gains.
The company says hooking up with US Foods would result in annual synergies of roughly $600 million after several years, which must appeal to a company that would benefit from reining in costs.
Regardless, it seems organic bottom-line growth isn't in the cards for now. Hence a big-ticket buyout.
A day in court
The administrative trial on the matter, to be effected through the FTC's administrative litigation system, is to begin in mid-July. The commission has also petitioned a federal court to issue a preliminary injunction to halt the merger pending the trial.
You can bet Sysco is sparing little effort and expense to push the deal through. There's $8 billion-plus on the line -- legal fights tend to get long and bitter when that kind of money is involved.
