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US Foods: Buying More Scale

Mar. 08, 2020 7:10 AM ETUS Foods Holding Corp. (USFD)8 Comments


  • US Foods is making another sizable deal in an effort to build scale and drive synergies.
  • I see the rationale behind the deal, yet pushing up leverage in such a potentially uncertain economic period could be questioned.
  • Leverage will increase quite a bit as the question is how large the impact of the Coronavirus will be.
  • Appeal seems to be on the increase, although high leverage is a small worry.
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US Foods (NYSE:USFD) is making a sizable move at a time when the general market is facing quite a bit of turmoil. The company is making a near billion acquisition for Smart Foodservice Warehouse Stores to further expand its empire. The rationale behind the deal is largely driven by greater scale and realization of potential synergies, yet this requires real integration as leverage will increase quite a bit in an uncertain economic environment.

Appeal is certainly on the increase given the recent share price decline, yet high leverage and a sell-off in the wider market is what prevents me from buying the current dip.

The Deal

US Foods has reached a deal with Apollo Global Management to acquire Smart Foodservice Warehouse in a $970 million cash deal. Smart Foodservice operates 70 small-format cash and carry stores in states like California, Washington, Oregon, Nevada, Utah, Montana and Idaho. Since 1955 these stores service restaurants and other food companies, with services provided by nearly a thousand employees.

The company generated about $1.1 billion in sales in 2019, indicating that about a 0.9 times sales multiple has been paid. With EBITDA seen at $85 million a year, margins on that metric approach 8% of sales and suggests that an 11.4 times multiple has been paid.

Rationale for the deal is undoubtedly scale, yet US Foods believes that the cash & carry business has good prospects with long-term growth seen at of 4-5% thanks to independent restaurants seeking cost effective and convenient solutions. The real kicker of course has to come from an anticipated $20 million in annual costs synergies (only fully achieved through 2024) thanks to purchasing efficiencies and expansion of private brands.

Leverage is set to increase to 4.0 times upon closure according to management, up a fraction from the 3.9 times leverage

This article was written by

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