Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

What do nuclear reactors and hospital food have in common? For all our sakes, hopefully not much -- other than they've been the subject of two of the most drawn-out corporate merger situations in recent years. One failed, the other is iffy. 

Menu Change
The merger uncertainty weighed on Sysco shares for a year and a half. But since then, Sysco has outperformed consumer-staples stocks and the broader market.
Source: Bloomberg

US Foods was the privately held target of Sysco Corp., which commenced a costly takeover process for the distributor of food to restaurants, hospitals, hotels and colleges in December 2013. It ended up collapsing 566 days later -- practically an eternity in merger world. On Tuesday, more than six months after the deal for US Foods was terminated, the company filed for an initial public offering. It's a less desirable exit plan for US Foods' private-equity backers -- KKR and Clayton Dubilier & Rice -- after having spent all that time trying to work out a deal with Sysco.

If you're a private company and someone wants to acquire you, it's far less cumbersome to negotiate a sale than to initiate the process of trying to take yourself public. And with markets as volatile as they are, this isn't the best time to debut to investors. (Only two companies have held IPOs in the U.S. this year, compared with 19 as of this date last year.)

LBOs Vanish
While financial buyers remain active, doing deals among one another and acquiring carve-outs of large corporations, they don't do nearly as many big company takeovers as they did in 2006-2007.
Source: Bloomberg

But what else was there to do? KKR and CD&R bought US Foods from supermarket company Royal Ahold in 2007, the height of the buyout boom. So they've been holding this thing nearly nine years, another eternity in deal world. (And by the way, the Sysco's cash-and-stock offer would have provided a 55 percent gain on the buyout firms' combined equity investment, plus the profit on stakes they took in US Foods' debt.)

Regulators ultimately decided that a tie-up of Sysco and US Foods would lead to higher prices, effectively quashing the deal in June. Two months later, Trian Fund Management, the activist firm run by Nelson Peltz, disclosed a stake in Sysco and snagged two seats on its board. Sysco shares have been doing OK since then, rising about 6 percent.

US Foods' fate is less certain, and we'll see how the IPO goes. The company's prospectus said it generated $23 billion of net sales in the year ended Sept. 26. Sysco is valued at a 43 percent discount to its trailing 12-month revenue, a multiple that hypothetically implies an enterprise value of about $13 billion for US Foods. 

That brings us to Pepco, whose takeover by Exelon is being dragged through a similar headache-ridden situation, and whose shareholders can only hope for a different outcome than what happened with US Foods and Sysco. 

Exelon and Pepco agreed to combine in April 2014 to transform Exelon, operator of the largest fleet of nuclear reactors in the U.S., into the country's biggest utility owner. Six hundred fifty-one days later, they're still awaiting approval from one of their market's regulatory bodies, the District of Columbia Public Service Commission. It initially voted to reject the merger in August, but Exelon asked it to reconsider. All the states where Pepco operates already approved the transaction, with some conditions. 

Exelon Chief Executive Officer Chris Crane said on the company's earnings call last week that if there isn't some sort of resolution from the D.C. commission by March 4, "we have to fold up" -- essentially, call off the deal and figure out what to do with merger-related debt it's already incurred. According to a Bloomberg News article in October citing Crane, it cost Exelon $10 million a month in interest for bonds it sold back in June to fund the acquisition.

Electric Slide
The spread between the offer price and Pepco's stock has been volatile, but at the current level it implies an 85 percent probability the deal will be able to close.
Source: Bloomberg

Investors are betting the deal gets done. Pepco shares traded Wednesday morning at 10:50 a.m. New York time for $26.35 apiece, about 3 percent below Exelon's all-cash offer. And while Pepco's short interest has nearly doubled this year, it's still relatively low at only about 2 percent of shares outstanding. Meantime, Exelon shares declined Wednesday because of something unrelated to this transaction: The Supreme Court put President Barack Obama's Clean Power Plan on hold. Sanford C. Bernstein's Hugh Wynne wrote that the company may be one of the most adversely affected companies by Tuesday's "highly unusual" decision, and indeed Exelon slipped more than 3 percent in morning trading.

Should the takeover plan fail, Pepco may take the harder hit, though. Back in August, when Washington rejected it, Pepco shares plunged 17 percent in one day, while Exelon's fell less than 7 percent. Still, it's too early to say these two will suffer the same fate as Sysco and US Foods. The commission has a little less than a month, and the market is still optimistic. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net