Sysco considers life with (or without) US Foods
Chris Kreidler, chief financial officer and executive vice-president of Sysco Corp., believes the Houston-based food distributor did enough during its recent 8-day hearing in front of a federal district court to save its planned merger with Rosemont, Ill.-based US Foods Inc.
In a May 28 presentation at the Citi Global Consumer Conference in New York, Mr. Kreidler spoke at length about the trials and tribulations of the merger, which was first announced in December 2013. He said he had a front row seat at the early May hearings, which saw Sysco and US Foods state their case for the merger while the Federal Trade Commission raised questions about antitrust issues.
In the end, Mr. Kreidler said he didn’t believe the F.T.C. “showed them the anti-competitive nature of our business for the transaction.”
“We believe it’s procompetitive,” Mr. Kreidler said. “We actually believe it will help competition in the industry and I think we did a fairly good job of doing that. So, it was an interesting trial. Like I say, I think the facts got on the table and I think the judge was very involved. He was certainly attentive. He asked lots of questions. I know he read briefs and it was obvious he was getting up to speed on how the industry works, listening intently. And that is frankly all we can ask for, is that we have a good audience (who) listens to the case and rules appropriately.
“So, I feel good, but again, I am not a lawyer. I am certainly not a judge. So I can’t say much more than that, although we had our day or days in court and now we will wait for the outcome.”
Closing arguments for the case were held May 28, and now the parties must await a decision. While they are expecting a prompt response, Mr. Kreidler said the companies are planning to hear a ruling some time during the latter part of June.
If the merger goes through, Performance Food Group is expected to pick up a portion of Sysco’s assets. Gregory Badishkanian, a restaurant and leisure analyst with Citigroup, asked Mr. Kreidler about P.F.G.’s potential as a No. 2 competitor in the food distribution business.
“P.F.G. is a very solid competitor today,” Mr. Kreidler said. “They will have a broader reach with the 11 assets that we have agreed to sell them, which makes them a somewhat different competitor in that they’ve got, again, a broader footprint from which to work with customers on distribution strategies. So, obviously, it makes them better than they are today and different than they are today. But they have always been a formidable competitor and they are going to be that way in the future as well.”
Mr. Kreidler also said he doesn’t anticipate any disruption with customers if the merger happens.
If the merger fails to go through, Sysco will be forced to look at all options, he said.
“I can’t really speak for the US Foods side,” Mr. Kreidler said. “I know that they have made some comments publicly that they would terminate the transaction at whatever point to have the ability to terminate the transaction. So, again, I won’t say anything more than what they have already said.
“We obviously need to get to a ruling. We need to read the opinion. We need to see what the ruling was, and if it’s unfavorable, why. You have got to kind of get to that point before you decide what’s the next step. There is always a chance that there is something in the ruling that you decide is appealable, but let’s get to that point and then we will find out what goes on after that. But this has been a long process, much longer than we thought it would take or frankly it should have taken. So I think both sides of this merger are to the point where we like to either know that we can get this done or we’d like to go back to our businesses.”
If US Foods isn’t an option, Mr. Badishkanian asked Mr. Kreidler if Sysco would consider acquiring a grocery distribution business. Calling it “an interesting question,” Mr. Kreidler said Sysco has looked at all sorts of different types of businesses.
“We call them adjacencies, so it is not exactly our business, but it is around the core of our business, so it speaks to the same vendor base, etc.,” he explained. “But when you start thinking and talking about grocery chains, I have a little bit of history in that industry itself. You have got to step back and say, ‘Why would we go into that business?’ Margins are not necessarily better or more attractive. It would be a little bit of growth. But once you do the first deal, there is not necessarily a lot of additional growth.
“You also have to step back and think about synergies. So while, yes, you are buying food product and distributing it, the retail side is much different than the food service side. A lot of these vendor suppliers are completely separate parts of the company. So we deal with the food service side of their business. We would now be dealing with the retail side of the business. So going after those synergies is not necessarily that easy. So we never say never on anything. We are always going to look for smart opportunities to grow the business. Looked at that one periodically in the past; I wouldn’t say it’s very high on our list, but it is certainly in the overall pool of things you would consider as an adjacency.”