WASHINGTON– The huge U.S. food distributor, Sysco Corp., has abandoned its proposed merger with U.S. Foods Inc., a move that will cost Sysco $300 million in break-up fees.
Calling off the merger also terminated Sysco’s agreement with Performance Food Group to jointly purchase U.S. Foods facilities in 11 markets.
After the announcement, Sysco’s shares dropped 2.16 percent, closing Monday at $37.54.
“Sysco and U.S. Foods’ decision to abandon the transaction is a victory for both competition and consumers,” Debbie Feinstein, director of the Federal Trade Commission’s bureau of competition, said in a statement Monday.
The food purveyor had been seeking the merger since late 2013 only to end the effort Monday, just days after the U.S. District Court in Washington issued an injunction favoring the Federal Trade Commission’s antitrust concerns.
“We believed the merger was the right strategic decision for us, and we are disappointed that it did not come to fruition,” Bill DeLaney, Sysco president and chief executive officer, said in a statement. “We will continue to look for strategic acquisitions.”
Sysco has an 18 percent share of a $255 billion food distribution market that includes the U.S., Canada, and the company’s presence in Ireland, according to Erin Lash, analyst with Morningstar Inc.
“But it only fulfills 30% to 40% of its customers’ spending, indicating that its clients are purchasing through multiple sources,” Lash wrote in her latest research. “We expect Sysco will remain a consolidator in this highly fragmented space, pursuing smaller bolt-on deals to build out its footprint and enhance its scale.”
The company’s board of directors has authorized an additional $3 billion share repurchase program, equal to about 13 percent of its current outstanding shares. The program will be funded through new borrowings as well as cash operations over the next two years.
Under terms of the abandoned agreement, the termination of the transaction requires Sysco to pay $300 million break-up fees to U.S. Foods and $12.5 million to Performance Food Group.
“Both of the fees will be paid in the first quarter of 2016,” Chris Kreidler, CFO of Sysco, said in the Monday conference call.
Sysco will soon begin the mandatory redemption of the $5 billion in merger-related debt.
“We’ll pay a one percent to a 50 million dollar premium to do so,” Kreidler said. “This process will take no more than 40 days, but we will move quickly to avoid as much interest expenses as possible.”