Sysco (Nasdaq: SYY) Buys U.S. Foods, Owns 25% of $235 Billion Market

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The headline "Sysco Corp. (Nasdaq: SYY) buys U.S. Foods" was music to investors' ears this morning, when the announcement sent SYY stock up 25% in early trading.

The cash-and-stock deal is reportedly worth $3.5 billion and further cements Sysco's position as the largest food distribution company in the United States. Sysco will also be assuming $4.7 billion of U.S. Foods' debt, bringing the deal's enterprise value to $8.2 billion.

Once the Sysco and U.S. Foods acquisition is finalized, the company projects annual sales of $65 billion.

Headquartered in Rosemont, Ill., U.S. Foods generates approximately $22 billion in annual sales. The company employs more than 25,000 people in its 60 locations. U.S. Foods also boasts a portfolio of more than 350,000 products.

Company officials expect the deal to be finalized in the third quarter of 2014.

"Sysco and U.S. Foods have highly complementary core strengths including a broad product portfolio and passionate food people deeply committed to customer service, quality-assured products and safety," Sysco CEO Bill Delaney said in a statement.

When Sysco bought U.S. Foods, it also took over the company's main shareholders: Clayton, Dubilier & Rice LLC and Kohlber Kravis Roberts KKR & Co.

Sysco (Nasdaq: SYY) Continues to Dominate Market Share

Sysco's numbers have been down in recent years. The company reported net profit of $992.4 million this year - a 12% drop from the previous year.

That was due in large part to the struggling restaurant industry. Independent restaurant operators account for about 63% of Sysco's customers, and slowing business at traditional, "sit-down" restaurants across the country has taken its toll on Sysco

Before Sysco bought U.S. Foods, the stock had been sluggish throughout 2013 - up just 8% for the year.

The news that Sysco would be increasing its size, production, and customer base sent the stock soaring 25% in early trading Monday. After opening at $43.05 this morning (Monday), SYY settled back down to $37.62, for a daily gain of 9.65%. 

Sysco now estimates that it will control 25% of the $235 billion U.S. food distribution market. Before the acquisition, it accounted for 18% of the market and had more than 425,000 customers.

"Combining and maximizing the significant strengths of two outstanding companies is certain to be of tremendous advantage in supporting our customers as they tackle the challenges of today's demanding environment," U.S. Foods' CEO John Lederer said.

Sysco's press release also stated that the acquisition of U.S. Foods will help the company "achieve annual synergies of at least $600 million after three to four years, primarily stemming from supply chain efficiencies, merchandising activities, and overlapping general and administrative functions."

If Sysco can live up to the hype it has created by acquiring U.S. Foods, then its stock should continue on the upswing. An 8% year-to-date return might be modest, but during a time when restaurants are struggling, SYY could be doing much worse.

The fact that Sysco only continues to increase its market share by acquiring competitors remains a good sign for investors.

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