Sysco Terminates $3.5 Bln Merger Deal With US Foods; To Buy Back Shares

(RTTNews) - Food-distribution giant Sysco Corp. (SYY) said Monday that it has terminated its proposed $3.5 billion acquisition of rival US Foods Inc. Instead, the company's board of directors has authorized the company to buy back up to $3 billion of its shares over the next two years.

The company's decision comes just six days after the U.S. District Court in Washington, D.C., granted the Federal Trade Commission's request for a preliminary injunction to block the proposed Sysco-US Foods merger. Sysco said that the action also terminates an agreement with Performance Food Group to purchase US Foods facilities in 11 markets.

Houston, Texas-based Sysco agreed in December 2013 to acquire closely-held US Foods for $3.5 billion in cash and stock, billed as the largest food-distribution deal in eight years in North America. With the assumption of US Foods' debt, the deal was valued at about $8.2 billion.

Rosemont, Illinois-basd US Foods' owners include private-equity firms KKR & Co. (KKR) and Clayton, Dubilier & Rice LLC. The two private equity firms own 98 percent of US Foods.

The Federal Trade Commission or FTC had filed an administrative complaint in February, charging that the proposed merger between two of the largest broadline foodservice distributors in the U.S. would violate the antitrust laws by significantly reducing competition nationwide and in 32 local markets.

According to the FTC, the deal would also have led to higher prices and diminished service for customers, including restaurants, hospitals, hotels, and schools.

Further, the FTC also rejected Sysco's plan to divest 11 food distribution centers that was aimed at addressing the concerns of the antitrust regulator. Sysco had agreed to sell these 11 centers, which generated $4.6 billion in annual revenues, to Performance Food Group.

Following the court granting its request to block the merger deal, the FTC had noted that the court ruling will preserve competition in both local as well as national broadline foodservice distribution markets.

Under the terms of the merger deal, Sysco is now required to to pay break-up fees of $300 million to US Foods and another $12.5 million in break-up fees to PFG for termination of the deal.

Bill DeLaney, Sysco president and chief executive officer said, "After reviewing our options, including whether to appeal the Court's decision, we have concluded that it's in the best interests of all our stakeholders to move on. We believed the merger was the right strategic decision for us, and we are disappointed that it did not come to fruition."

Sysco said it will continue to drive earnings through commercial and supply chain initiatives, including category management and revenue management in its core business, as well as by pursuing cost-saving opportunities.

Sysco's board of directors has authorized the company to spend an additional $3 billion to buy back shares over the next two years, equal to about 13 percent of the company's current outstanding shares at recent prices.

The company noted that these share repurchases will be in addition to the amount it normally buys to offset benefit plans and stock option dilution. The company plans to fund these share purchases from new borrowings and cash flow from operations.

Sysco intends to buy back about $1.5 billion in shares in each of the next two years. As part of the first year's purchases, the company expects to put in place an accelerated share repurchase program.

Sysco also said it will start the process of redeeming the $5 billion of merger-related debt under the mandatory redemption provisions contained within those notes. The company expects the process to take no more than 40 days.

SYY is trading at $37.80, down $0.57 or 1.49 percent on a volume of 868,899 shares.