Deals

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.

As merger activity crescendoed in recent years, U.S. antitrust regulators under President Obama developed a reputation for taking a hard line, especially regarding the biggest transactions.

Just this year, they shot down mergers between Staples Inc. and Office Depot Inc. as well as Halliburton Co. and Baker Hughes Inc., and are in the process of trying to block two giant health insurance deals. But once Donald Trump assumes office and his Republican administration takes over, there could be a change in tone -- so much so that in some cases, it may be worth it for companies to try again.

The would-be merger that arguably has the best chance of a revival is Sysco Corp.'s acquisition of US Foods Holding Corp., which was terminated last year after failing to receive approval from the Federal Trade Commission.

What's crucial is that deal nearly gained the green light: it was voted down 3-2 along party lines (with Democrats in the majority). At the time, Joshua Wright, a Republican and one of the two FTC commissioners who was willing to let the deal through, took to Twitter to share his thoughts:

Last month, Wright penned a New York Times op-ed and wrote that "a high level of concentration in an industry simply does not mean the industry lacks competition. Concentration and competition are distinct concepts." As part of Trump's transition team, he's in a position to recommend a new FTC commissioner and chairman, and it's fair to expect his picks will also have an open mind when it comes to consolidation. 

That's good news for Sysco and US Foods. An FTC with a Republican tilt may be more willing to accept Sysco's argument that the competition faced by the duo is fierce and that the "overwhelming majority" of restaurants and food operators choose local food-service distributors rather than those with nationwide capabilities. 

Even though US Foods's value has climbed since the original transaction, Sysco's has risen too, with the $30 billion company's shares hitting an all-time high on Friday. A deal still makes strategic sense, especially if the benefits of scale, improved productivity and enhanced product offerings can propel the combine company toward targeted annual cost savings of at least $600 million (within four years) as previously projected. Assuming those synergies, and if Sysco funds roughly 15 percent of the transaction with cash and is willing to pay a 30 percent premium, a deal would be 22 percent accretive, according to data compiled by Bloomberg.   

Take Two?
US Foods has rallied some 10 percent since its IPO and would require a premium in any takeover, but that should be no impediment for Sysco, whose shares are trading at an all-time high
Source: Bloomberg

Another reason for hope of a tie-up between the two food-distribution companies is that KKR & Co. and Clayton, Dubilier & Rice LLC, which each own 37.8 percent of US Foods, are yet to sell any shares. The company's private equity owners didn't sell any of their holdings as part of the IPO, nor have they sold any since their lockup agreement ended last month and would be motivated sellers at a premium. 

In the end, if a second attempt to combine Sysco and US Foods is more successful than the first, other once-dead deals may be resuscitated. Who's up for Staples and Office Depot, round two?  

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

  1. The prior deal represented a transaction multiple of 9.9x trailing Ebitda. A new deal would be in the range of 11.9x. By the same token, Sysco's own multiple has risen to 13.9x from around 9.8x at the time the original deal was announced. 

  2. 14.3 percent of the equity portion of the original deal was comprised of cash. The earnings accretion level could decline if the duo decide to bump up the number of distribution centers they're willing to sell to Performance Food Group Co. as a way to appease regulators (this figure sat at 11, previously). Also, the synergies figure could be even higher, as the $600 million relates only to operating synergies and financial synergies including interest savings exist too. 

  3. Or round three even, if you include their mid-1990s attempt.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

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