Sysco Gain Shows No Buyer’s Remorse for Deals: Real M&A

Sysco Corp.’s biggest intraday stock jump since at least 1980 was just the latest blow to the conventional wisdom that acquirers should brace for a selloff.

After announcing yesterday its agreement to buy US Foods for $3.5 billion, Sysco’s shares rose as much as 26 percent and closed up 9.7 percent. Among the 25 largest acquisitions announced this year by U.S. companies, buyers’ share prices have risen more often than not on the first day of trading after the deal was announced, according to data compiled by Bloomberg.

Following decades of acquirers’ stocks being neutral or falling, investors are now more quick to embrace transactions that utilize growing cash piles, offer entrance into new markets and boost operational efficiency, according to a report from JPMorgan Chase & Co. Sysco, North America’s largest distributor of food to restaurants, is being rewarded for not overpaying for a deal that will expand sales to $65 billion, said Morningstar Inc. Sysco also projected the deal will immediately boost earnings and lead to annual savings of $600 million after three to four years.

“Even a skeptic can look at the numbers and see that it makes sense,” said Peter Sorrentino, a Cincinnati-based money manager at Huntington Asset Advisors Inc. “A lot of deals used to be dilutive and so investors became skeptical, and that’s why you saw acquirers’ stocks get hit. It has changed in the last few years.”

M&A ‘Faith’

Investors are now rewarding companies that can lay out a clear plan for how an acquisition will boost both revenue growth and profitability, Sorrentino said in a phone interview. His firm oversees about $14.7 billion.

“Nobody takes much on faith anymore, so management has to come out and really sell these deals,” he said.

Sysco said the acquisition of Rosemont, Illinois-based US Foods will boost its share of the U.S. market to about 25 percent from about 18 percent.

US Foods’ owners, including KKR & Co. and Clayton, Dubilier & Rice LLC, will keep a 13 percent stake in the combined entity, which Erin Lash of Morningstar said is adding to shareholders’ optimism about the transaction.

The private-equity owners “could feel that there’s further upside possible,” Lash, a Chicago-based analyst, said in a phone interview. “The addition of US Foods is going to enhance Sysco’s geographic reach and add to their scale, which is obviously a plus.”

Deal Valuation

Including debt, the deal is valued at about $8.2 billion, or 9.9 times US Foods’ adjusted earnings before interest, taxes, depreciation and amortization in the most recent 12 months, according to the statement. That compares with a median unadjusted Ebitda multiple of about 12 for food transactions valued at more than $1 billion in the last 10 years, according to data compiled by Bloomberg.

Including the company’s projected synergies of at least $600 million, the deal is only about 5.8 times Ebitda, Edward Kelly, a New York-based analyst at Credit Suisse Group AG, wrote in a note yesterday. He also estimated that the takeover may boost earnings by more than 50 cents a share.

Sysco shares pared their gains yesterday to 9.7 percent, the biggest jump on a closing basis since May 2011, after both Moody’s Investors Service and Standard & Poor’s put Sysco’s credit ratings on review for a possible downgrade.

Today, shares of Sysco fell 0.9 percent to $37.27 at 10:37 a.m. New York time.

Investors are embracing large deals in an “unprecedented manner,” JPMorgan’s corporate finance advisory group wrote in its report, “Uncorking M&A: The 2013 Vintage.”

Actavis Jump

For more than 25 percent of mergers and acquisitions by U.S. and Canadian companies in 2012, the acquirers’ shares outperformed the S&P 500 Index by more than 10 percent in the week following announcement of the deal, the report said. That’s up from about 15 percent of M&A transactions that resulted in that big of a gain in 2011.

For example, shares of Actavis Plc surged 12 percent on May 10 after Bloomberg News reported that the maker of generic drugs was in early-stage negotiations to acquire Warner Chilcott Plc. The companies confirmed the talks the same day, and the $8.5 billion takeover closed in October. The acquisition allowed Actavis to shift its domicile to Ireland from the U.S. to help reduce its taxes.

Applied Materials Inc., the largest chipmaking-equipment supplier, jumped 9.1 percent on Sept. 24 to a five-year high after announcing its takeover of Tokyo Electron Ltd.

The market is clearly rewarding buyers that are capitalizing on cheap financing to pursue consolidation, said Todd Lowenstein, a Los Angeles-based fund manager at HighMark Capital Management Inc., which oversees about $19 billion.

“Most of these deals are not at big premiums relative to historical takeouts and are accretive immediately with attractive internal rates of return,” he said in an e-mail. “The market has figured this out and therefore is not punishing suitors but actually rewarding them.”

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