Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Sysco's European foray got a frosty reception from investors, but in time they may warm up to it.

The $24 billion food distributor's stock fell as much as 6.5 percent on Monday, on track for the biggest single-day decline since 2008, after Sysco announced a $3.1 billion acquisition of Europe-focused Brakes Group

Rally Halted
Sysco shares slumped from an all-time high after the food distributor said it's buying Brakes Group.
Source: Bloomberg

At a valuation of 11.9 times Brakes's 2015 adjusted earnings before interest, taxes, depreciation and amortization, the deal is more expensive than the one Houston-based Sysco struck with US Foods, which valued its smaller rival at 9.9 times trailing Ebitda (that deal was eventually terminated over antitrust issues).  It's also closer to Sysco's peak EV/Ebitda multiple of 12, reached last week, and well above the company's two-year average of 10.2, according to data compiled by Bloomberg. 

For investors, not only was the price not right, but many would have preferred if Sysco's biggest-ever acquisition was closer to home and came with some synergies to boot. Take for instance their reaction to the US Foods deal agreement in December 2013: Sysco's shares soared as much as 26.5 percent. That was in part thanks to promises of cost synergies, which were expected to reach $600 million annually within four years by removing overlap from supply-chain, merchandising, and administrative functions. 

The Brakes deal, on the other hand, has "minimal overlap" with Sysco's existing business, according to Sysco CEO Bill Delaney, and will be run independently.

Worth the Wait?
Sysco explored a purchase of Brakes in 2007. The purchase price has climbed since then, but its own shares also gained 28 percent in the period, adding roughly $3.5 billion in market value.

Sysco sees the opportunity for Brakes to take more share of the U.K.'s food-service market, where "food away from home" (at restaurants, hospitals, prisons, schools,  etc.) as a percentage of total food spending is 42 percent compared to 50 percent in the U.S.  Sysco is expecting that percentage to increase and Brakes  -- as the leader in the segment -- should benefit. It's unclear, though, how quickly this will play out. Brakes also has a robust pipeline of potential add-on acquisitions, which could help it to grow -- which, depending on their size, could reduce Sysco's ability to return capital to shareholders.

In making its pitch for the deal, Sysco said its European bet won't get in the way of its $3 billion share buyback program, nor its commitment to growing the size of its dividend over time while maintaining its investment-grade credit rating. 

Sysco's Delaney is adamant that the deal represents a way for the company to grow profitably over the long term. And since its biggest shareholder, Trian Fund Management, is now in possession of two board seats (one which is occupied by Nelson Peltz), a dud deal surely would have met some internal opposition. 

Delaney also says the Brakes deal won't cause Sysco to take its eye off the ball. As long as that's true, and presuming the company keeps up its efforts to lift its margins and cut supply-chain and other costs, shareholders may be more than happy to live with it.

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

  1. The deal cancellation came at a cost for Sysco: breakup fees of $312.5 million ($300 million to US Foods, $12.5 million to Performance Food Group, plus some $50 million to redeem bonds issued to fund the merger).

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