Chain of Thought

Sysco/US Foods Merger Has Mega Supply Chain Implications

The major news outlets announced another marriage of corporate convenience this week, this one between two food industry giants. Sysco Corporation and US Foods have agreed to merge into one mega foodservice company in a deal valued at $8.2 billion. As part of the transaction, Sysco will also take on US Foods’ $4.7 billion net debt. Bill DeLaney, Sysco president and chief executive officer, said the companies have “highly complementary core strengths including a broad product portfolio and passionate food people.”

According to Sysco’s official statement, the transaction is expected to “generate annual synergies of at least $600 million after three to four years, primarily stemming from supply chain efficiencies, merchandising activities, and overlapping general and administrative functions.”  It adds that the deal is expected to close in the third quarter of calendar year 2014, and “is subject to customary closing conditions and regulatory approvals, including antitrust approval.”

Could the Federal Trade Commission pull the plug on this, reasoning that it’s not fair to be so big? I asked Enan Stillman, an attorney with the law firm of Graham & Penman LLP, who specializes in transportation and logistics as well as mergers and acquisitions. He said the parties involved must have already done their due diligence in this matter, including  completion of the necessary premerger notification and prerequisite lengthy forms. They had to give the Department of Justice (DOJ) and the Federal Trade Commission (FTC) all the numbers they needed. With this information the DOJ and FTC will decide if this acquisition will harm consumers. If they think it will, they’ll take legal action to prevent this marriage from consummating. Stillman thinks Sysco has this figured out, though.

“It’s likely that Sysco may be willing to divest some of the U.S. Foods business to obtain approval and close the deal,” he told me. “That being said, this deal will face other challenges because the [Obama] administration has been hostile to any proposed transaction that reduces market competition.” 

Stillman noted that the FCC Commissioner recently told the Wall Street Journal that the FCC is unlikely to sign off on any proposed merger between Comcast and Time Warner Cable. 

“While the FCC may view the proposed Sysco transaction more favorably than a deal between the two largest U.S. cable providers, Sysco will still face some challenges before it can gobble up yet another competitor.”

Let’s go back to Sysco’s statement about supply chain efficiencies. Today, not only is logistics going global for many companies but so are economic challenges. As Ron Giuntini, another panelist on MH&L’s board of experts, told me, these companies will depend on economies of scale, not only in the number of facilities they end up with, but inside those walls to include material handling equipment, inventories and back-office infrastructures. Companies of all sizes need to apply logistics best practices if they want to boost earnings.

While all this sounds like great economic news, Giuntini volunteered to play the role of Debbie Downer in the wake of Sysco’s upward mood swing.

“This merger will not necessarily be great for the material handling and truck OEMs,” he said. “Equipment utilization rates will be higher after the merger and, in turn, demand for new equipment will be less. Also, the purchasing power of the newly merged company could decrease the margins of the OEMs/distributors.”

By this time next year we should know whether Sysco’s taking on $4.7B of new debt will pay off for them and whether any consequent supply chain network efficiencies will cut payouts to suppliers.

Tell me what you think.

 

 

 

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