KKR's U.S. Foods Going Public, Valued $2B Less Than When Taken Private

| About: US Foods (USFD)
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US Foods IPO trades on the open market beginning Thursday, June 16th.

The prospectus indicates that the company turned a profit in its most recent years of operations.

Firms KKR and CD&R took U.S. Foods private as equal partners and will remain majority owners. Will you join them?

US Foods (NYSE:USFD) was taken private in 2007 by Clayton, Dubilier & Rice, Inc and KKR (NYSE: KKR) in a deal valued at a whopping $7.1 billion. The company was called U.S. Foodservice until a company-wide rebranding effort undertaken in 2011.

In this article we'll take a look at US Foods' the scenario -- where are present owners KKR and CD&R going to end up in this deal? We'll take a look at the financials and recent events that point to some further improvements. Then we'll formulate an opinion on whether this is a great IPO to jump on board with.

KKR and CD&R's Position

These two diversified private equity firms are equal owners of the US Foods company. Together they took the company private for a deal valued at $7.1 billion during 2007. From 2010-2011 US Foods resumed its 20-plus year strategy of growth through acquisition, expanding market share by purchasing 10 related food service wholesalers and retailers.

After the IPO is complete the aforementioned firms will still possess a controlling stake in the company.

US Foods Financials

The company has had ups and downs through the years, often running deep into the red on an accounting basis. Their most recent financials statements for the period ending April, 2016 indicate an operating profit of $16 million for the quarter ended.

US Foods' free cashflow from operations has been consistently positive for the years 2012-2016 and has grown at a rate of 10.16%.

One concern is their long-term debt of $4.9 billion that has not shrunk since at least 2012! Another is the net losses on an accounting basis for the years 2013, 2014, and 2015.

During 2015 they generated $402 million free cashflow from operations, paid $147 million in capital expenditures to maintain and grow the business, and a whopping $278 million cash went out on interest payments.

My View on the Financials

The low-down is that US Foods running dozens of distribution centers, fleets, warehouses, and so forth, will have to spend more than $147 million per year on capital improvements like they did in the 2015 reporting period. They spent $191m and $293m on property, plant, and equipment during the preceding years, after all.

They have shrunk debt payments by $20m per year, to $278m in the most recent period. Management states that they plan to pay down debt with the $1.01 billion of IPO money and a new $500m senior notes offering at 5.85%. Considering that all of those funds go to the paying down of debt, I estimate that their annual interest expense will be reduced by approximately $60m, taking them from $278m to $218m for the years going forward.

Considering their expenditures on capital improvements regress to nearer to their average of $200m (they're maintaining and improving over $9 billion in assets) and interest payments rough out to $218m, that's $418 million in capital outflows. During 2015 they generated just $402 million in free cashflow.

I don't see where owners will be able to take profits from this business. They're losing money on an accounting basis. They don't appear likely to generate substantial free cash flow after capital expenditures and debt payments.


Everything I'm seeing about this company indicates that they have one good quarter to show for the trailing sixteen that I reviewed. While US Foods is among the top three companies by market share in their business, they're dominated by the eight times larger Sysco.

I don't see the nimbleness of a small company at $20-plus billion in annual sales and believe the company is buried under too much debt for their earnings power.

This IPO doesn't look like a surefire winner for a long-term investment horizon. This IPO is a bullish indicator for KKR and not a recommended buy.

US Foods 2015 Annual Report 10-K

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.