Updated from 9:21 a.m. ET with afternoon share prices and Credit Suisse comments.
NEW YORK (TheStreet) -- Food services giant Sysco (SYY - Get Report) has agreed to buy U.S. Foods for $3.5 billion from private-equity firms Clayton, Dubilier & Rice and Kohlberg Kravis Roberts (KKR - Get Report), in a cash- and-stock takeover.
When combined with U.S. Foods, Sysco expects to have about $65 billion in annual sales and operating cash flow of $2 billion, the company said. Of that, it appears U.S. Food's $22 billion in annual sales will contribute about one-third of the group's combined revenue. Sysco shares were rising nearly 10% in Monday afternoon trading, indicating investors see a strong strategic rationale to the merger, which is expected to generate significant cost savings and immediate earnings growth.
Houston-based Sysco will pay $3 billion in cash and $500 million in stock for U.S. Foods and also has agreed to refinance the company's approximately $4.7 billion in outstanding debt. When counting debt, Sysco's total acquisition comes in at $8.2 billion. Sysco said in a press release it has secured fully committed bridge financing for the deal and expects to issue permanent financing prior to closing.
Sysco said it expects to maintain an investment-grade credit rating as part of the acquisition. The company also expects the deal will immediately benefit its earnings, upon closing.
KKR and CDR bought U.S. Foods in May 2007 from Royal Ahold for $7.1 billion. Monday's sale of U.S. Foods may put to rest the troubled acquisition of U.S. Foods, which included battles with the company's unionized workers and a high debt load after the 2007 LBO. It also may indicate strong demand for food services suppliers as private-equity backed Aramark moves towards an initial public offering.
In a rare move for a private-equity sale, KKR and CDR will be accepting some of Sysco's stock as part of the company's U.S. Foods acquisition. After completion of the deal, KKR and CDR will hold a combined 87 million in Sysco shares, or roughly 13% of the company's outstanding stock. Both funds will also have a representative join Sysco's board.
"Combining and maximizing the significant strengths of two outstanding companies is certain to be of tremendous advantage in supporting our customers as they tackle the challenges of today's demanding environment," John Lederer, president and chief executive officer of US Foods, said in a statement.
KKR and CDR declined to comment.
Sysco calculated that it will be buying US Foods at a multiple of just under 10-times the company's trailing 12-month adjusted EBITDA of $826 million. The transaction is expected to yield annual cost synergies of at least $600 million after three to four years, Sysco said, primarily from supply chain efficiencies, merchandising activities, and overlapping general and administrative functions.
"Sysco's acquisition creates an industry powerhouse with scale 5x greater than its next largest competitor, enhances geographic coverage and the product offering, combines two companies with similar philosophies, and creates projected synergies of at least $600 million (2-3% of acquired sales)," Edward J. Kelly, an analyst with Credit Suisse wrote in a Monday client note.
Kelly upgraded Sysco shares to 'neutral' from 'underperform and raised his 12-month price target for the company's shares from $32 to $40.
The analyst highlighted a possible Federal Trade Commission antitrust review as a possible risk to the merger, given that Sysco and U.S. Foods could control about a quarter of the overall foods distribution market when combined. "FTC approval could require divestitures," Kelly wrote.
Prior to Monday trading, Sysco's 8% year-to-date gain had significantly underperformed the S&P 500 Index.
Goldman, Sachs is serving as financial adviser to Sysco and Wachtell, Lipton, Rosen & Katz and Arnall, Golden & Gregory are serving as its legal advisers. Simpson Thacher & Bartlett and Debevoise & Plimpton are serving as US Foods' legal advisers.
-- Written by Antoine Gara in New York.