Is the market still hungry for fresh initial public offerings? We'll soon find out, as large-scale foodservice distributor US Foods Holding hits the market on Thursday. The scope of the IPO fits the size of the company; the issue looks set to top the $1 billion mark. Here's what investors will be getting for their money.
Feeding the market
US Foods Holding is one of only two food distributors with a nationwide reach. It's the no. 2 in that duopoly behind top dog Sysco (NYSE:SYY). The two were set to combine when Sysco's bid to acquire its rival for $3.5 billion was announced in late 2013.
But in mid-2015 a federal judge effectively halted the deal, stating in a preliminary injunction that "the proposed merger will substantially impair competition in the national customer and local broadline markets." Sysco and US Foods Holding went their separate ways rather than fight the ruling. Although that judge might disagree, US Foods Holding describes the domestic foodservice distribution market as "fragmented," adding that it has "a long history of growth."
Citing data from research company Technomic, US Foods Holding said the market should expand at a compound annual growth rate of 2.4% for the 2015 to 2020 period. This compares favorably to the 1.3% from 2010 to 2015.
Higher growth would surely help the company's results. Net sales have advanced only incrementally over the past few years, coming in at $23.1 billion last year, $23.0 billion in 2014, and $22.3 billion in 2013. Since 2011, it's booked only a single annual net profit ($168 million last year).
By contrast, although Sysco's revenue growth is only slightly more dynamic, it consistently lands in the black. It's also extremely reliable at returning money to its investors -- in fact, it's a Dividend Aristocrat, a rare bird that's lifted its payout at least once every year for a minimum of 25 years running. The company's current distribution yields a respectable 2.6%.
Shareholders won't be rewarded as handsome by holding US Foods Holding. In its latest IPO regulatory filing, the company bluntly admitted, "We have no current plans to pay dividends on our common stock after the completion of this offering."
Not the main course
So in the end, no. 2 in its market US Foods Holding feels like very much the no. 2 choice for investors. Sysco is a much more powerful company, habitually turns a profit, and shares some of the take with its investors. For those itching to buy into the foodservice business, I don't see a compelling reason to put money on the underdog here.
As mentioned, US Foods Holding's IPO is scheduled to take place this Thursday. The company will be listed on the New York Stock Exchange under the ticker symbol USFD. Just over 44.4 million shares are to be offered, at a price of $21 to $24 apiece.
Goldman Sachs, Morgan Stanley, and JPMorgan Chase's J.P. Morgan head the underwriting syndicate.