Updated from 9:21 a.m. ET with afternoon share prices and Credit Suisse comments.
NEW YORK (TheStreet) -- Food services giant Sysco (SYY) has agreed to buy U.S. Foods for $3.5 billion from private-equity firms Clayton, Dubilier & Rice and Kohlberg Kravis Roberts (KKR), 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.