• Food distributor 1 of 2 national players in fragmented field
  • Owners KKR, CD&R don’t plan to sell shares in offering

US Foods Holding Corp., the food distributor taken private at the peak of the leveraged buyout boom in 2007, is going public this week, almost a year after a thwarted takeover by its larger rival.

The company is seeking to raise more than $1 billion on Wednesday, in what could be the biggest corporate initial public offering this year, offering 44.4 million shares for $21 to $24 each. 

Food distributor Sysco Corp. was prevented by regulators from buying US Foods last June, after agreeing to acquire the company in 2013 for about $3.5 billion. That process, which lasted for about a year and a half, disrupted growth and created a miasma of uncertainty that the company is still trying to shake off.

Investors seem willing to look beyond that. As of Tuesday, there was demand for more shares than were being offered at the marketed range, people with knowledge of the matter said, asking not to be identified because the information is private.

National Scale

One reason may be something the company highlighted on its marketing tour, or roadshow, for the IPO: scale. US Foods is one of two national players in a fragmented industry, selling to independent restaurants, chains and larger institutions like hospitals.

“You’ve only got Sysco and US Foods that have a national footprint,” said Ajay Jain, a senior analyst at Pivotal Research Group LLC in New York. “In the case of the food-service distribution industry, it’s somewhat unique in that you don’t have a lot of visible names in that sector.”

US Foods, based in Rosemont, Illinois, also is offering its shares at a discount to peers. At the midpoint of the offering range, US Foods would have a market value of about $4.8 billion. That implies a price to 2015 adjusted earnings before interest, taxes, depreciation and amortization multiple of about 5.5, based on data compiled by Bloomberg. By that measure, Sysco trades at 11.7 times adjusted Ebitda and Performance Food Group Co. trades at 8.9, the data show.

A representative for US Foods didn’t respond to a request for comment.

Performance Food, based in Richmond, Virginia, went public last year. It has a market value of about $2.6 billion and the shares have climbed about 32 percent from their debut. Sysco, based in Houston, has a market value of about $27 billion.

Merger Hangover

Last June, a federal judge blocked Sysco’s takeover of US Foods, saying a merger of the food-distribution giants would probably reduce competition and raise prices for hotels and restaurants. The hangover from that busted union continues.

In the relationship-driven food-distribution industry, uncertainty is bad for business, said Pivotal’s Jain.

“The merger process was very disruptive, especially for US Foods,” he said. For food distributors to be successful, they “require a very incentivized and stable sales force.”

Growth Rate

It also hurt revenue. The company posted net sales of $23 billion in 2015, about the same as the year before. That compares with growth of about 3 percent in 2014 and 2013. 

“The merger discussions with Sysco had a meaningful impact on our growth rates,” US Foods Chief Financial Officer Fareed Khan said during the roadshow. “Annual sales growth slowed to about a third of its prior run rate as many potential customers hesitated about switching their business to us.”

KKR & Co. and Clayton Dubilier & Rice acquired US Foods for about $7.2 billion in a leveraged buyout completed in 2007. They don’t plan to sell any shares in the IPO. After the offering, the two firms will each hold about 39 percent of the common stock, regulatory filings show.

Most of the proceeds from the offering will be used to repay debt, according to the prospectus.

In an effort to differentiate itself from its rivals, and to look forward, US Foods highlighted to investors its business with individual restaurants and smaller businesses. Specifically, those customers’ desire to attract millennials -- the 20- to 30-year-olds that make up the biggest percentage of working adults.

“They like to experiment,” US Foods Chief Executive Officer Pietro Satriano said during the roadshow. “They like diversity. They like sustainable products and they like healthy products.”

“You have to have a broad assortment and you have to have the supply chain capabilities,” he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE